Commodities and downtrodden equities in favour

Over the past week investors have turned more positive on the outlook for the global economy and for a peaceful resolution to the Ukrainian crisis, with more cyclically-sensitive assets performing strongly…..

Although US bond yields have declined, possibly partly due to weaker than expected growth data from the US in the first part of the year, most forward indicators point to US recovery in Q2 2014. Stronger US growth and indications China’s stimulus policies are starting to have a positive effect on China growth (PMIs hit 5 year highs in May), give us confidence that global recovery remains on track, supporting our positive view on downtrodden cyclical assets, with commodities, growth currencies and cheaper equity markets likely to perform.


MA Weekly 02.06.14 1

Nickel price correction likely short-lived, but we prefer copper. Despite the 5% price fall last week, nickel remains the best performing industrial metal this year, with a 37% rise. While we believe that nickel may have near-term upside on momentum buying, stretched positioning and elevated inventories could cap further price rises. Given positioning and sentiment, we view copper as a less risky way to play the rebound in global growth. The US natural gas price jumped 5% last week as higher temperatures are expected in the lower 48 US states over the next couple of weeks. However, with inventories on a rising trend as supply ramps up, we maintain a medium-term negative view on the Henry Hub price. Wheat price dropped by a further 4.1% last week, as investors became more optimistic on a peaceful resolution to the Ukrainian crisis. Ukraine and Russia account for 16% of global wheat exports.


MA Weekly 02.06.14 2

European bourses rally on European elections, leveraged MIB index up 11%. The Italian FTSE MIB rose 6% (and the 2X leveraged FTSE MIB index rallied 11%) as voters endorsed Prime Minister Renzi’s reforms in the European elections. Meanwhile the DAX hit an all-time high, rising 2% over the week. While the results of the European elections showed a rise in anti-establishment parties, the pro-European centre-left and centre-right will keep hold of about 70% of the legislature, keeping most investors happy with the results. Gold miners felt the drag of falling gold prices. Gold fell 3.2% over the week, while the DAXglobal Gold Mining index fell 4.7%. The European Commission’s report on energy security released last week, discussed nuclear in more favourable terms than recent rhetoric in the EU. The WNA Global Nuclear energy index rose 2.4% over the week.


MA Weekly 02.06.14 3


ECB expected to ease, keeping downward pressure on the Euro. It is crunch time for the ECB this week, with consensus expectations favouring an easing in policy settings at its Thursday meeting. The ECB has previously noted the risks stemming from a strong Euro and if the ECB does nothing, after indicating comfort in changing policy at this week’s meeting, the Euro will spike higher and confidence in policymakers to deliver will vanish. The Bank of England is likely to continue to be mildly dovish, keeping GBP under pressure. While the market largely dismissed the disappointing US GDP data last week, payrolls numbers will likely provide a better indication of the health of the economy. We expect further broad USD strength as signs of recovery sees bond yields reversing their recent decline. Indeed, greater optimism has seen more negative positioning for the Swiss Franc as investors unwind defensive positions.



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