Russia’s invasion of Ukraine, a breadbasket of Europe, saw commodity prices that were already rising pushed even higher. Today, with investors betting on higher long-term inflation than before the war, high commodity prices could be a deciding factor in Fed interest rate hikes for some time to come. reported the Financial Times.
A measure of market sentiment regarding future interest rates is the five-year forward rate, which measures inflation expectations over a five-year period, starting five years from today. This percentage has risen to 2.5% from 2.1% before commodity prices soared due to the Russian invasion of Ukraine.
Commodities soared globally, with Brent crude hitting a 14-year high this week, and natural gas, wheat and nickel all saw strong price gains. Investors piled into commodity funds faster than before when the concern was simply inflation.
“Throughout this year, we’re going to be looking at very, very high inflation in the United States at every upcoming Fed meeting,” said David Mericle, an economist at Goldman Sachs. “I just don’t see them going through a meeting with inflation so far above their target and not going ahead with a rate hike.”
The Fed faces the difficult task of finding the balance to reduce inflation, pushed further by high commodity prices, including energy costs which are negatively impacting businesses and consumers, while not tightening too sharply and crushing economic growth, forcing a recession.
“The Fed is going to be walking on eggshells,” said Meghan Swiber, rates strategist at Bank of America.
Invest in commodities with diversification
For investors looking to diversify their portfolios in times of inflation and rising interest rates while taking advantage of any potential rise in commodity prices, the WisdomTree Enhanced Commodity Strategy Fund (GCC) can be a great option.
Image source: ETFdb.com data courtesy of FactSet
GCC had net inflows of $75.92 million year-to-date through March 7, with $27.35 million in inflows on March 7.
GCC invests in a basket of commodities and bitcoin futures, seeking to diversify assets that are uncorrelated to most equity and fixed income returns. The fund is an actively managed ETF that offers broad exposure to the following commodity sectors: agriculture, energy, industrial metals and precious metals, primarily through futures. It may also invest up to 5% of its net assets in bitcoin futures, a regulated space under the jurisdiction of the CFTC, but it does not invest directly in bitcoin.
The current weighting of the GCC is 32.49% Energy, 22.89% Industrial Metals, 18.74% Grains (Agriculture), 13.95% Precious Metals, 6.07% soft products (agriculture) such as cotton and sugar, 3.47% for livestock (agriculture). ) and 2.39% to bitcoin futures.
GCC has an expense ratio of 0.55%.
For more news, insights, and strategy, visit the modern alpha channel.