ETFs - International and Commodities ETFs’ Markets Overview

Although everybody already believes that the world economy is deep in recession, the National Bureau of Economic Research only on Monday confirmed that the United States had entered a recession one year before, which dragged all the ETfs down. In order to stimulate economies, central banks all over the world continue to cut the key interest rates: Central Banks of England, Sweden, New Zealand and ECB cut the rates this week. This helped European ETFs to climb up in the beginning of the week. However, these early gains were overshadowed by the statement that region’s economy will shrink next year made by the ECB president Jean-Claude Trichet. S&P 500 and Dow Jones Indices were dragged down by 3% by the pessimistic job reports on Friday.

All the commodities ETFs traded in Investment Game ended the week at lower price than they opened on Monday, except for PowerShares DB Silver Fund (DBS) which managed to gain 1.47% per week and closed at 13.57EUR (17.26USD). The worst weekly performers were PowerShares DB Oil Fund (DBO) with a decline equal to even 16.51% and PowerShares DB Base Metals (DBB) which lost 12.33% of its value during this week. There was no common trend among international ETFs: some ETFs have fallen, some have risen this week. The winners of the week are iShares FTSE/Xinhua China 25 Index Fund (FXI) and iShares MSCI Turkey Investable Market Index Fund (TUR) with increases equal to 5.90% and 5.47% respectively. The biggest loser is iShares MSCI Canada Index Fund (EWC) which dropped to 12.09EUR (15.38USD) resulting in 9.58% weekly decrease. 

This week PowerShares DB Oil Fund (DBO) decreased by 16.51% and reached the price of 14.99 EUR (19.01 USD) becoming the biggest decliner among commodities ETFs.

As the global economy is slowing down, the demand for oil is significantly decreasing. On the 5^th of December crude oil prices fell to the lowest point in almost four year after the U.S. statistics bureau reported that U.S. suffered the biggest job loss in 34 year, meaning that recession is getting even worse than was expected by some economists.  On Friday, crude oil fell to 42 dollars a barrel, and closed 71 percent lower from a peak – 147 dollars a barrel.  What is more, the International Energy Agency cut its forecast for 2009, because of economic slowdown.  Furthermore, the U.S. Energy Department reported that fuel demand during November was down by 6.5 percent, compared to the year before. On the other hand, the Organization of Petroleum Exporting Countries is trying to respond to decreasing oil prices by arranging the meeting with its current members on Dec. 17, with a goal to cut output even more.  Some of analytics are forecasting that such cut can stabilize prices, but we have seen the effect of the previous output cut, which haven’t helped at all.  

The second biggest loser of the week among commodities ETFs is PowerShares DB Base Metals (DBB), which decreased by 12.33% and reached the value of 9.23 EUR (11.73 USD). The PowerShares DB Base Metals Fund (DBB) consists of futures contracts on some of the most liquid and widely used base metals – aluminum, zinc and copper, reflecting the performance of the industrial metals sector. It is based on the Deutsche Bank Liquid Commodity Index - Optimum Yield Industrial Metals Excess Return and is managed by DB Commodity Services LLC.

Base metals are used mainly in manufacturing. For example, copper is used in homes, appliances, electronics and cars and, therefore, is often used by economists as the indicator of economic growth. For these reasons it is not a surprise that the global recession and credit crisis had a negative impact on demand for base metals. According to Deutsche Bank AG, base metals are correlated with the stock market more than any other commodities. People do not want to invest in commodities that are so sensible to bad economic news. That is why copper has plummeted 68 percent since its peak at .2605 in May and most likely will end up with the first annual decline since 2001.

This week the signs of global recession and economic slowdown are becoming more and more obvious. Purchasing managers´ indexes (showing production level, new orders from customers, supplier deliveries, inventories and employment level) in Europe, Russia, China and South Africa fell drastically. On Monday Federal Reserve Chairman Ben S. Bernanke said that the economy “will probably remain weak for a time.” On Thursday, the expectation that aluminum demand growth in China, which is the world's biggest producer and consumer of aluminum, will halve during 2009 appeared. On Friday, after the news about U.S. unemployment reaching its highest rate since 1993, base metals dropped the most this week.

Decreasing copper prices caused plans to cut outputs from producers. Freeport-McMoRan Copper & Gold Inc., which is the world´s second-largest producer, announced they are ready to cut output for the third time. However, one could hardly believe that this will boost prices for copper.

The consequences of the credit crisis and new evidence about the global recession will not make the market more optimistic. Moreover, most of the expectations about future situation are more than pessimistic. According to Bloomberg.com, “economists at JPMorgan Chase & Co. estimate industrial production will decline in developed markets this quarter by the most since 1980.” This is a signal that the situation for base metals may worsen dramatically. Next week the data on retail sales, consumer sentiment and Producer Price Index in the USA, and most likely the news will be pessimistic. As base metals are quite sensitive to news like that we expect them decrease next week. 

One of the weekly winners among international ETFs is iShares MSCI Turkey Investable Market Index Fund (TUR), which increased by 5.47% reaching the price of 24.87 USD (19.56 EUR). In the beginning of the week a decline could be noticed which was mostly influenced by the general pessimistic mood and decreasing tendencies in the world. However, on Tuesday Turkiye Garanti Bankasi A.S. announced that the company has signed a syndicated loan worth 4 million with 20 banks from 10 different countries. These news changed the mood of investors positively and led to an increase in company’s share price as well as in the value of the whole ETF because Turkiye Garanti Bankasi A.S. is the biggest holding of iShares MSCI Turkey Investable Market Index taking 10.10% of the total portfolio. A slight growth could also be noticed on Wednesday and only on Thursday the price started dropping due to a decline in oil price. Nevertheless, the market recovered on Friday as Turkcell Iletisim Hizmetleri, the major provider of mobile services in Turkey and the third biggest holding of the ETF, announced Q3 results that indicated the revenue growth of 19%. 

iShares MSCI Canada Index (EWC) is the international ETFs which faced the largest scale decrease this week. Since Monday opening it dropped by 9.58% and closed at 12.09 EUR (15.38 USD) at the end of the week.

The index started to decline on Monday, when the data on Canadian GDP showed 0.10% growth, which is two times less than expected 0.20%.

Moreover, the price of index was being dragged down by the declining prices of base metals and oil (almost all commodities ETFs declined during the week except Silver Fund) as Industrial Materials and Energy sectors make up 45.86% of the EWC fund portfolio.

On Tuesday Bank of Nova Scotia announced that its profit fell by 66%. On Friday Royal Bank of Canada decreased its annual earnings as net income for the fourth quarter fell by 15%, which is the longest streak of declines in nine years. The confidence in the financial sector of Canada, which makes up 34.46% of the portfolio, fell even more. This dragged the whole index down.

In addition, on Friday Canadian government announced the data which showed that in November the labor market of Canada experienced the biggest decline of employment since 1982, led by manufacturing. This could be the signal that the world’s eighth-largest economy is going to fall into recession in the nearest future.

Canada’s political crisis is the main reason why we expect that the EWC index will continue falling next week. Investors expect fiscal actions in prevalent situation. Most likely, their expectations will not be fulfilled as the nation’s legislature will be closed for the next seven weeks. 

Overall, almost all world economies are heading into even deeper slowdown. US trade deficit, which is due to be announced on Thursday, is expected to contract as the import prices drop. US employment report is expected to show decreasing numbers of working Americans. Slumping commodities prices result in forecasted 2% fall, a fourth straight decline, in the Labor Department’s producer-price index, due to be reported December 12. So far, decreasing production costs lead to deflation which is a sign of prolonged recession in the USA. European indices will be influenced mainly by the announcements made ECB president on Monday, and Swiss National Bank on Thursday. More interest rate cuts are expected which should led to price increase of European countries ETFs in the end of the week.