Recession fears cool off commodities

Commodity ETFs were the market all-stars of the first half of the year, with both supply and demand being squeezed by various factors causing commodity prices to soar to their highest level since 2008. Broad commodity ETFs benefitted, such as the $4.4 billion Invesco DB Commodity Index Tracking Fund ETF (DBC), which gained over 28% through June 30.

The strong double-digit gain in the first half of the year is impressive, and a bright spot in portfolios that hold an allocation to this asset class, as both equities and fixed income have come under pressure. The low correlation and diversification offered by commodities allowed the asset class to see strong flows of nearly $15.9 billion in the first half of the year, according to Trackinsight data.

However, DBC had gained nearly 47% through the beginning of June before the tides began to turn. Commodities have come off their highs as recession fears mount, fueling a sell-off across the commodity complex.

Natural gas declines

Though oil and energy-related ETFs still boast some of the strongest year-to-date returns, natural gas ETFs have seen losses in the past month after natural gas futures posted their worst month in more than three years. The price decrease was driven by an increase in supply that comes at the same time as predictably lowered demand in the summer months.

Related ETFs such as the United States Natural Gas Fund (UNG) and the United States 12 Month Oil Fund (UNL) fell by -31.9% and -27.4%, respectively, in the month of June. Both of these ETFs hold natural gas futures, with UNG offering exposure to near-month futures contracts. UNL holds the 12 nearest-month futures contracts, which has helped to shelter its return slightly. 

For European investors, funds such as the WisdomTree Natural Gas ETF (NGAS) have faced a similar fate, falling by -34.4% in the past month.

Metals cool off

Metals and related ETFs have also cooled off. The broad-based Abrdn Bloomberg Industrial Metals Strategy K-1 Free ETF (BCIM) fell by 16.2% in the month of June. This ETF holds allocations to four different metals: copper, aluminum, zinc, and nickel.

The Invesco DB Base Metals Fund ETF (DBB) is a similar fund, except it forgoes the allocation to nickel, holding equal-weighted allocations to aluminum, copper, and zinc. This ETF has fared slightly better, falling by -15.5% in the month of June.
These metals are known as industrial metals because they are essential for many commercial and industrial applications. For this reason, they tend to be a good barometer for sentiment around the business cycle. When economic growth is strong, demand for these metals increases, driving up the price. However, decreased economic growth or a recession will have the opposite effect on this sector, explaining recent performance.

Agriculture ETFs wilt

Agriculture futures such as corn and wheat have also been falling, a welcome relief to consumers facing high food costs after the Russian-Ukraine war drove prices up due to both countries’ status as top producers of these crops. Other exporters of these crops, such as Australia and Brazil, are expected to have banner years, easing supply concerns. 

The Teucrium Wheat Fund (WEAT) fell by -17.6% in the month of June, while the Teucrium Corn Fund (CORN) fell by -10.8%. European funds such as the WisdomTree Wheat (WEAT) and WisdomTree Corn (CORN) have likewise fallen in price.

Has inflation peaked?

Though the recession is a concern for investors and CEOs alike, the decline in commodity prices is likely a relief for many consumers. Soaring energy prices and increasing food costs have made essential purchases pricier, pressuring consumers and driving negative sentiment. 

The U.S. will find out whether the economy is officially in a recession when the Bureau of Economic Analysis releases the advance estimate of Q2 GDP on July 28. It will likely take even longer to find out whether inflation has peaked. 

In the meantime, the Federal Reserve seems committed to continued action, with Jerome Powell indicating another 50 or 75 bps rate hike likely to come in July. Whether the central bank will be able to achieve a soft landing is yet to be seen. However, the price action in commodities suggests that the Fed could be overshooting its target.