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Market Overview

The China Trade War Is Crushing This Commodity ETN

The China Trade War Is Crushing This Commodity ETN

Countless corners of the financial markets are being plagued by the US-China trade spat. Away from the markets, American farmers are being pinched, too. Just ask cotton farmers.

What Happened

The often overlooked iPath Series B Bloomberg Cotton Subindex Total Return ETN (NYSE: BAL), an exchange traded note offering exposure to the soft commodity, slid 3.66 percent on Monday on volume that was more than six times the daily average. Monday's decline extends BAL's one-week loss to 10.25 percent, meaning the entirety of the ETN's year-to-date loss has been realized in just the past week.

BAL's underlying index “reflects the returns that are potentially available through an unleveraged investment in the futures contracts on cotton,” according to iPath. “The Index currently consists of one futures contract on the commodity of cotton which is included in the Bloomberg Commodity Index Total Return.”

Why It's Important

As the White House moved to increase tariffs on Chinese imports, China has retaliated by levying tariffs of its own on U.S. imports, including a slew of agriculture commodities, such as cotton. Previously, China has been one of the primary export destinations for American cotton.

On a domestic political level, nine of the top 10 cotton producing states were carried by President Trump in the 2016 election with California being the exception. Texas and Georgia are the top two cotton states and combine for 54 electoral votes.

As for BAL, China is clearly signaling it will go toe-to-toe with the Trump Administration on tariffs, but when it comes to cotton, China may not be able to keep the tariff gambit up because a crop-eating pest is spreading quickly across the country, potentially forcing China to import more soft commodities, including cotton.

“Damage from the so-called fall armyworm, which gorges on corn, soybeans, cotton, rice, and dozens of other crops, could force China to import more corn, rice or soy to makeup for the shortfall,” reports CNBC.

What's Next

Residing nearly 17 percent below its 200-day moving average and 32.24 percent below its 52-week high, BAL is in a bear market and it probably needs more than crop-eating pests in China to brighten its near-term outlook. BAL bulls need the U.S. and China to make nice on trade before a credible rally comes to pass.

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