When Giants Clash: US–China Trade Tensions and Spillovers in Commodity Markets

In recent years, commodity market dynamics have garnered significant attention from investors and portfolio managers seeking to enhance portfolio performance, even amid economic and political uncertainties that influence commodity markets. Therefore, in this study, we examine the interconnectedness between US-China trade tensions and commodities (both metals and agricultural) using a Time-Varying Parameter Vector Autoregressive (TVP-VAR) framework, using monthly data from January 2010 to February 2024. The findings reveal that metals such as copper and palladium act as net receivers of return spillovers, while gold, silver, and platinum serve as net transmitters. Findings further reveal that among agricultural commodities, oats emerge as a net receiver, whereas corn, wheat, soybeans, and canola function as net transmitters of return spillovers. In the volatility connectedness framework, silver, copper, platinum, palladium, wheat, and soybeans are net receivers of volatility spillovers, while gold, corn, oats, and canola transmit volatility shocks across the network. Notably, trade tensions amplify volatility in commodity markets, with gold and silver serving as safe-haven assets, whereas agricultural commodities remain vulnerable to uncertainty. Moreover, metals drive spillovers across markets, while agricultural commodities exhibit more localized dynamics. Additionally, return-based connectedness surpasses volatility-based connectedness, highlighting stronger interdependence in price movements. The portfolio analysis indicates that a diversified portfolio comprising these metals and agricultural commodities offers valuable opportunities for investors and portfolio managers.