U.S. equity markets plunged to end the week as fears over rate tightening in China sent shares tumbling across the board; the Dow finished the day lower by 0.8% while the broad S&P 500 fell by 1.2%. However, this paled in comparison to the steep losses in the Nasdaq which sank by 1.5% to close out the week on the back of a 2.3% loss in Google and a 2.7% drop in shares of Apple. While these losses were severe, they were nothing compared to the rough day in the commodity markets; gold tumbled by 2.6% while oil fell by 3.6% in Friday trading. Meanwhile, soft commodities once again sank as sugar tumbled another 11.6% today while cotton fell by 3.6% as slowdown fears in China shredded the recent surge in commodity markets.
The broad sell-off came as the Chinese government reported that the pace of inflation hit a two-year high, worrying investors who are growing increasingly concerned that the country’s central bank may be forced to raise rates in order to combat inflation and keep prices stable. “The thought of China continuing to tighten spooks commodity markets,” said Matthew Zeman, a metal trader at LaSalle Futures Group in Chicago. “Gold is being dragged down with all commodities.” A Bloomberg survey of analysts predicts that the one-year rate may increase to 5.81% up from 5.56% while the deposit rate is expected to climb 25 basis points up to 2.75%. “China sent shivers through the market,” said Michael Gross, an analyst at OptionsSellers.com in Tampa, Florida. “Prices will continue to fall next week.”
One of the biggest losers on the day was the PowerShares DB Agriculture Fund (DBA) which plunged by 4.2%. This sharp drop came after heavy losses in the soft commodity market which make up a large percentage of DBA’s holdings. Soybeans, sugar, corn, coffee, and cocoa all make up at least 11% of the total assets in the fund and all of these products were down by at least 2.9% and were led on the downside by sugar (-11.6%) and corn (-5.2%). “The commodity market overall has turned bearish, and a lot of traders have become risk averse,” said Ricardo Scaff, a trader at Rabobank International in New York. “‘The European Union news is negative, and it has become expensive for some funds to hold positions with the jump in the margin requirements.” [see more on DBA's holding page]
One of the only winners in the ETFdb 60 was the iPath S&P 500 VIX Short-Term Futures ETN (VXX) which surged by 4.8%. The popular fund posted incredible volume of close to 18.6 million shares; roughly 9 times its daily average as investors snatched up this ETN as a way to play the ‘fear index’. “Whenever you see volatility indexes rising like this, that indicates that people are searching for protection in the options market either in the indexes, exchange-traded funds or individual equities.” said TD Ameritrade chief derivatives strategist Joe Kinahan. Although this gain helped to push VXX up 5.7% on the week, it has barely helped to make a dent in the fund’s sluggish medium-term performance levels. The ETN is now down 51.9% over the past half year period and has slid by 65.1% year-to-date [see more on VXX's fact sheet].
Disclosure: No positions at time of writing.