by Ryan Lewenza, CFA, CMT, Private Client Strategist, Raymond James
USD, China and the Materials Sector
• Commodity prices have been under significant selling pressure in recent weeks, with the CRB Continuous Commodity Index (CCI) down roughly 13% since its April high. More importantly, with the recent weakness, the CCI index has broken below its long-term uptrend, possibly signaling the official end of the much touted commodity “supercycle”.
• An important near-term contributor to the weakness in commodity prices has been the recent strength in the US dollar. We are bullish on the US dollar which, given the negative correlation with commodity prices, could provide a headwind to the space.
• Another concern we have with the commodity complex is the deceleration of emerging market economic activity over the last few years, particularly in China. The Chinese economy grew at an average of 9.4% in the 2000s, but has downshifted to roughly 7.5% over the last few years. We believe China’s slowing economy and de-emphasis on investment spending is likely to be an additional headwind for the commodity complex.
• We remain market weight the materials sector as attractive valuations for the sector are offset by concerns over China’s slowing economy and US dollar strength.
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