• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Basic Materials

Commodities in Short Term Macro Trading Selloff; Watch the Dollar

The dollar rally is driving commodity prices at the moment.
By ELIECER PALACIOS
Aug 15, 2018 | 04:46 PM EDT
Stocks quotes in this article: BHP, EMB, GSC

The selloff in energy and mining commodities continues on the back of a strong dollar rally which started in mid-April, triggered by a flight out of risky assets and a deceleration of the Chinese economy. This is reflected in the appreciation of the U.S. dollar, when measured by the U.S. Dollar Index (DXY), which is up 4% over the last three months and almost 9% over the last 6 months.

We anticipate the dollar's upward trend will continue as investors trim emerging markets positions on the back of Turkey's lira devaluation, China's slowdown, market-moving U.S.-China trade wars, and Russia/Iran sanctions. We wouldn't be surprised if DXY approaches 100 where it last traded in early 2017.

Copper Catches Turkey Contagion

NYMEX Copper futures are entering bearish territory after sliding below $3 per pound in mid-June, their lowest level since 2017, an 18% fall over the last 6 months, reflecting the negative outlook on global growth measured by China's weaker-than-expected industrial production and retail sales growth, and exacerbated by negative headlines from trade wars and sanctions.

Copper is sensitive to trade tariffs and emerging markets, which are home to major producing hubs. In addition, Union workers in Chile, one of the world's largest copper producers, are preparing a strike against the world's largest copper mine, La Escondida, which is owned by BHP Billiton Ltd.  (BHP) .

Energy Being Dragged Along

Central bank intervention to curb currency speculation in emerging market countries such as the Turkey and Indonesia, is causing investors to flee the sector into U.S. dollar-denominated, investment grade assets, exacerbating the selloff in commodities.

Turkey has a 4.6% weighting in the JP Morgan Government Bond Index-Emerging Markets Global Diversified Index, a widely tracked benchmark for emerging market debt and ETF investors, such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) . Turkey comprises less than 5% of the MSCI Emerging Markets Index, a major equities benchmark for emerging markets, with China accounting for 31% of the index.

Macro Traders Adding Noise

Let's remember that base metals account for more than 10% of the S&P GSCI Index, a major commodity benchmark, where copper, represents 4% followed by aluminum. Energy commodities are the largest component (58.6%). Thus, a major drop in a leading commodity like copper could drag along the rest of the components in the basket.

West Texas Intermediate (WTI) crude oil is the largest component of the S&P GSCI Index, at 24.7%, followed by Brent crude oil, 16.8%. While geopolitical events such as the Iran sanctions potentially could move the supply/demand balance, energy commodities have traditional moved in the opposite direction from the dollar.

Added to this volatility are a dozen exchange traded funds (ETFs) and exchange traded notes (ETN) tracking commodities. For example, the iShares S&P GSCI Commodity-Indexed Trust (GSC) , which contributes to price dislocation as funds must buy or sell futures to reflect the index weight. The same applies for equity options tracking these indices.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Palacios had no positions in any securities mentioned. 

TAGS: Commodities | Markets | Basic Materials | Investing

More from Basic Materials

Looking for Higher Highs After a Trex Correction

Bruce Kamich
Jan 22, 2021 12:20 PM EST

Some new accumulation (buying) around the $85 area should set the stage for further gains.

PotlachDeltic's Charts Are Strong Like the Housing Market

Bruce Kamich
Dec 30, 2020 10:45 AM EST

Here's where aggressive traders could look to go long PCH.

Iron Ore Soars, But Will the Pinch Between Supply and Demand Continue?

Maleeha Bengali
Dec 9, 2020 10:00 AM EST

For now, China's infrastructure-led stimulus efforts are helping drive demand for iron ore at a time when production is under pressure.

The Doctor Is In and Probably Isn't Going Away

Ed Ponsi
Dec 8, 2020 9:00 AM EST

Copper has had a nice run, and the likelihood the worst of the pandemic soon could be behind us could mean increased consumption ahead.

Despite Crowded Stores, Lowe's Charts Have Turned Lower

Bruce Kamich
Dec 2, 2020 12:17 PM EST

Avoid the long side of LOW until fresh support develops.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 06:43 AM EST BOB LANG

    Webinar Time -- After the Close today

    join me later today as we talk about markets and w...
  • 11:48 AM EST STEPHEN GUILFOYLE

    Cashing in Some More Chips at Stocks Under $10

    We're trimming a position for a big gain today.
  • 08:34 AM EST GARY BERMAN

    Wednesday Morning Fibocall for 1/27/2021

    The "correction" can be coming sooner than we thou...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login