Are You About To Become a Victim of the Tariff War?

July 13, 2018  |  Michael Reilly

So, it appears the next BST (big scary thing) for investors to worry about are TARIFFS…

And here’s what investors should know…

The world’s two largest economies, the United States and China, have squared off in what is shaping up to be an historic trade war – a war that threatens to disrupt international commerce.

In the end, trade tariffs rarely benefit anyone.

Trade wars cause a sudden drop in demand of products hit by the tariff.

And right now, Commodities are directly in the cross hairs as the United States and China trade barbs over everything from cars and computer chips to nuts, soybeans, and even wine!

Commodities markets are made up of 4 major sectors, including – Energy, Industrial Metals, Precious Metals, and Agriculture.

None of the 4 major commodities sectors have been immune to falling prices – all have experienced selling over the last few weeks – including oil, an area of strength behind the recent rise in commodities. (Click here to see our previous article which takes an in-depth look at this action.)

However, if you’re the type of investor willing to risk it based on predictions and maybes, here’s a little nugget for you..

I came across a research note issued on July 5 by an unnamed large investment bank, it said they believe the commodities market will not experience a huge fall due to the recent heat-up in trade war talks between the United States and its key trading partners.

According to their research, commodities prices are now set to rise…and could see a 10% return on commodities in the upcoming 12-month period.

For all other investors, who prefer to trade (as we do) based on what is happening vs. a prediction of what might happen in the future, read on…

Commodities rose to the #3 strongest Asset Class based on relative strength analysis on January 23, 2018, long before there was talk of tariffs.

Since the tariff announcement, it’s been a different Commodities market.

To help illustrate the challenges facing commodities today, I’ve included the chart below  – it shows where the selling in the commodities markets has taken place.

The black line is the Invesco Commodity Tracking Fund (DBC)a broad commodities ETF that tracks prices of securities of the 4 commodity sectors. DBC can be viewed as a general proxy of Commodity prices.

The fund (DBC) is still 6.4% higher since the start of the year. But that’s almost entirely due to the fact that energy prices have climbed 16% this year (blue line).

Using three other Invesco commodity ETFs as proxies, we can see that three of the 4 commodity indexes are deep in the red for the year.

The Invesco Precious metals ETF (DBP) is down -5% for the year. That reflects falling gold and silver prices which have been hurt by a rising dollar.

The two weakest groups have been Agriculture and Base Metals.

The Invesco agriculture ETF (DBA), is down -3.89% as of July 12, 2018, after falling as much as -7% in recent trading.

According to one Bloomberg report, China’s Ministry of Commerce reportedly told companies to import more soybeans (among other goods) from countries other than the U.S.

Following the announcement, two separate trades of DBA – one for 221,000 shares, another for 132,200 shares – took $6.2 million dollars off the books of the Invesco Agriculture ETF.

Base metals – Aluminum for example, have suffered the most from the trade war between the world’s two largest economies – dropping sharply in the middle of June.

The Invesco Base Metals ETF (DBB) (shown in magenta), had declined by -15% and now sits at -9.38% year-to-date (see arrow).

So, that leaves Energy (DBE) as the only remaining bright spot in the Commodities space.

And, from a relative strength perspective, Energy (DBE) remains in a positive trend in spite of the recent sell-off.

Until commodities prove themselves with more consistent rising prices and positive trends, investors are only guessing and taking unnecessary risk.

But, by tracking the relative strength of the Commodities sectors and their constituents against all other investment opportunities, investors stand a good chance of avoiding market weakness and seeking out market strength, regardless of where in the world those opportunities arise.

If you’re a client of Rowe Wealth Management, you can rest assured that we’ve been constantly monitoring the situation and have taken all this data into account when rebalancing.

If not, you may want to contact your advisor to ensure they’re seeing what’s going on within the market, and behind the scenes of the tariff war. If this info is news to them, you may want to consider scheduling a consultation with one of our advisors to ensure your accounts are being properly managed.

Qualified investors will receive a free evaluation from one of our advisors, and we can quickly and easily determine if your portfolio is exposed to unnecessary risk, or if you’re missing out on potential growth.

Click here to see available appointment times now.

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