The commodity markets saw a choppy 2014, with the metals and mining ETF space being one of the most hurt spaces. A rising greenback amid QE-wrap in the U.S., concerns of further Fed tightening, global growth worries, deflationary fears, and last but not the least, the Chinese economic slowdown caused metal ETFs to see their worst days in several years.
However, to many investors' surprise, metal ETFs received a fresh lease of life and logged refreshing returns in the last five days (as of April 27, 2015) along with several other commodity ETFs. In fact, metal and mining ETFs have been displaying a pretty nice trend lately healing their year-to-date bloodbath to a large extent (read: Industrial Metals ETFs Investing 101).
A host of factors have led to this ascent. Among these, a dovish Fed, which is in no hurry to hike key interest rates, and the resultant weakness in the U.S. dollar, as well as geopolitical tensions arising from the Saudi attack on Yemen are worth mentioning (read: 3 Industrial Metal ETFs to Buy Amid Weak Global Trends).
Lukewarm U.S. economic data including manufacturing, service sector and new home sales actually have put things on hold back home. The Fed intends to look for more stabilization in the inflation and job data before raising the short-term rates after six long years.
To top it all, policy easing in China has been giving a big-time boost to the metal and mining ETFs. The Chinese central bank has been resorting to back-to-back rate cuts. Investors should note that the Chinese economy accounts for about half of the global consumption of the industrial commodities.
Will the Uptrend Last Long?
While investors celebrated these unexpected gains in the broader commodity space and invested on compelling valuation, we would like to note that this whole set of commodity ETFs, especially metal and mining ETFs may be fooling you.
These gains look to be short-lived given the protracted slowdown in the Chinese manufacturing sector and still-weak global fundamentals. The Chinese economy is undergoing a tumultuous phase having witnessed a 24-year low expansion in 2014.
Its manufacturing reading for April plunged to a one-year low of 49.2, hinting at the apparent failure of easing measures taken so far. Sluggish demand along with profound deflationary pressure in the manufacturing sector is weighing on the sector. Given this situation, any further surge in the metal ETFs looks unlikely unless a major monetary easing is announced.
Last month, Morgan Stanley (NYSE:MS) too slashed its price forecasts for roughly all base metals and bulk commodities owing to a slowing Chinese industrial sector. The bank lowered its 2015 forecast for nickel price by 23%, iron ore by 28% and coking coal by 16%. The bank went on to lower its 2016 copper price forecast by 14% and nickel forecast by 19% (read: Copper ETFs Tumble as World Bank Cuts Global Growth Forecast).
Plus, though the Fed tightening speculations may have come to a halt, sooner or later, the step will be taken this year, and the greenback will once again return to its firming form to dent commodities.
One can easily portend that such a gloomy long-term outlook for metals will surely gnaw into all recently secured gains in the coming days. So, investors need to be vigilant over investing in the below-mentioned ETFs, as these products are actually walking on a slippery path and might run out of steam anytime soon.
iPath DJ-UBS Copper Total Return Sub-Index ETN (JJC) - up 2.8% in the last 5 days (as of April 27, 2015); down 1.88% (YTD); and down 11.7% (1 year)
Global X Copper Miners ETF (NYSEARCA:COPX) - up 8.5% (last 5 days); up 6.4% (YTD); and down 14.4% (1 year)
Metal & Mining ETFs
SPDR S&P Metals & Mining ETF (NYSEARCA:XME) - up 2.1% (last 5 Days); down 9.5% (YTD); and down 32.3% (1 year)
iShares MSCI Global Metals & Mining Producers ETF (BATS:PICK) - up 6.7% (last 5 days); up 3.9% (YTD); and down 17.2% (1 year)
Global X Junior Miners ETF (NYSEARCA:JUNR) - up 2.7% (last 5 days); up 5.3% (YTD); and down 27.8% (1 year)
PowerShares DB Base Metals ETF (NYSE:DBB) - up 3.0% (last 5 days); down 0.1% (YTD); and down 2.1% (1 year)
Along with the broader market tailwinds, a strike at BHP Billiton's (NYSE:BHP) Cerro Matoso mine in Colombia flared up the supply shortage tension. This could make nickel ETFs true short-term winners.
iPath DJ-UBS Nickel Total Return Sub-Index ETN (NYSEARCA:JJN) - up 6% (last 5 days); down 12.1% (YTD); and down 29.4% (1 year)
iPath Pure Beta Nickel ETN (NYSEARCA:NINI) - up 6.5% (last 5 days) down 10.2% (YTD); and down 26.4% (1 year)