Commodity ETP Weekly: Commodity ETPs See Outflows as Tapering Concerns Intensify

Better-than-expected economic data from the US reignited fears of early tapering by the Fed, keeping commodity price gains in check and prompting further outflows from commodity ETPs despite signs of strong China and US commodity demand…..

ETF Securities Research

Economic indicators continue to point to a pick-up in US economy, with the November manufacturing and jobs data both surprising on the upside. We expect the US Federal Reserve to begin to taper bond purchases in Q1 2014 as the employment picture continues to strengthen. While Fed tapering is likely to provide support for the US dollar in the near-term – historically a headwind for commodity performance – we believe that commodity prices will look through this in 2014 given that US dollar gains are the result of a strengthening economy which ultimately will be positive for commodity demand and prices.

Gold ETPs record the biggest outflow since June on tapering fears. Positive economic data from the US last week reignited fears of an early Fed tapering, prompting US$220mn of outflows from long gold ETPs. We expect the US Federal Reserve to begin to taper bond purchases in Q1 2014. While the strength of the US dollar will likely limit gold price gains, we also believe that strong physical demand, coupled with falling gold supply and already extremely negative sentiment and positioning will limit price downside. Silver ETPs saw US$7.2mn of outflows on sluggish industrial demand.

Profit taking drives US$14mn from long natural gas ETPs as price jumps to six-month high. The Henry Hub natural gas front month futures price broke above US$4.1MMBtu last week, the highest level since May, as stockpiles fell by over 4% on a week prior. The EIA expects colder winter temperatures in 2013 and 2014 to increase natural gas consumption for residential and commercial heating. At the same time, investors appeared to be rotating into broader exposures to benefit from the expected increase in energy demand in 2014, with ETFS Longer Dated Energy ETP (ENEF) recording US$19mn of inflows last week.

Choppy trading prompts US$38mn of outflows from long copper ETPs. The copper price recovered modestly last week, rising above US$7,000 per ton, after having been severely hit by the general bearish sentiment on commodities in recent weeks. Concerns about future supply have been a key reason for the bearish sentiment and sluggish price performance in 2013. However, demand remains robust enough to absorb new supply that is coming on stream. The continuation of the global economic recovery, particularly in China, should provide solid support for copper prices going forward. Meanwhile, investors took profit on their zinc positions last week, as price rose 1.7% on a week earlier.

Key events to watch this week. Industrial production figures for Germany, China, the UK, the Eurozone, India and Japan will be released this week and will be watched closely to assess the strength of the recovery in those countries. Eurozone Finance Ministers will be having their monthly meeting on Tuesday and are expected to be deciding on the single bank resolution authority. On Thursday, ECB president Draghi will be discussing the European Central Bank’s monetary policy developments with the European parliament.





Although gold often gains during extreme events, the start of the first US Federal shutdown in seventeen years last week failed to lift the gold price. Investors appear to be looking through the storm and are focused on assets that will either benefit from the continuation of the global growth recovery or are generally uncorrelated with debt risk.  Cotton and sugar gained 2.3% and 1.8% last week, bouncing from lows hit in September, but without strong news driving the trend. Platinum and palladium fell 3.6% and 2.5% respectively. That comes despite a 17% rise in Japanese auto sales (to a 14-month high) and a 12.1% rise in UK car sales (to a five-year high). US car sales also remained brisk, despite the timing of Labor Day distorting the monthly statistics. Autocatalyts are the primary source of demand for the platinum group metals (PGMs). The strike that started two weeks ago was still on-going last week at Amplats, constraining the supply of PGMs.

    MA Weekly 07.10.13 1


US equities remain under pressure as the negotiations over raising the US debt ceiling continue. The S&P 500 fell for the second consecutive week as Republicans and Democrats continued to fight over the budget and debt ceiling. European equities have also been sensitive to the political turmoil in the US. The Euro Stoxx 50® Investable Volatility Index, which provides exposure to the forward implied volatility of the Euro Stoxx 50® Index, surged 5% last week, followed by the FTSE® MIB Super Short Strategy Index and the ShortDAX® x2 Index, up 3.5% and 1.4% respectively. Global equities are likely to remain volatile and under pressure as we get closer to the estimated 17 October hard deadline for lifting the debt ceilding.

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Safe haven currencies benefit as US fiscal negotiations drag on. The Japanese Yen (JPY) was the best performing G10 currency last week as investors sold risky assets and paid back JPY loans on growing concern about the lack of progress on US fiscal and debt negotiations.  For similar reasons the Swiss Franc (CHF) and even the Euro (EUR) also rallied against the US dollar last week. The British Pound (GBP) held up, continuing the trend of the past three months. However, towards the end of the week the currency showed some weakness, indicating the rally may be peaking. In our view, the GBP is one of the more overvalued G10 currencies and – despite recent rhetoric – has one of the more dovish central banks. We therefore believe the currency is particularly vulnerable to a sharp drop once growth data stop surprising to the upside.

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