Commodity ETP Weekly: Investors Look to Industrial Metals to Leverage Ongoing Cyclical Upswing

Investors continued to rotate towards more cyclical assets, after official reports showed manufacturing activity in the US, China and Europe picked-up in August, with copper ETPs a major

ETF Securities Research

beneficiary of the improved sentiment. While precious metals came under pressure last week on improved global conditions, they recouped part of their losses on Friday following a slightly disappointing August US non-farm payrolls release and downward revisions to jobs for the prior two months. With the US labour market still showing some softness, the Fed might want to get more information before they start tapering. This should continue to help support to precious metals, particularly gold. Meanwhile, geopolitical fears kept oil prices well supported last week, prompting some investors to increase exposure to Brent crude on increased likelihood of a US military strike on Syria.

ETFS Copper (COPA) receives largest inflows in 11 weeks as rising manufacturing activity confirms global rebound. COPA received US$13.5mn last week as US ISM and European and Chinese PMIs surprised on the upside last week. China’s manufacturing activity reached a 16-month high. Chinese consumers appear to have been using imports to restock in recent weeks, as inventory levels have posted sharp declines. Rising copper demand, and the potential for additional supplies to disappoint, is likely to continue to support prices.

Profit taking drives US$39mn of outflows from silver ETPs. The silver price has gained 19% over the past month, prompting investors to partially reduce positions. Unlike gold, around half of silver demand is industrial, with the metal being widely used in electronic applications. Growing evidence of the improving global economic outlook has seen COMEX stockpiles stabilise and is likely to add to support for the silver price.

Inflows into long Brent ETPs reach 2½ year high on geopolitical instability. Approximately 3mn barrels of oil production per day are off-line at the moment due to geopolitical problems in Libya, Iran, Nigeria and Syria. In Libya, labour strikes and pipeline attacks remain a major concern, with production being reduced by around 1.2m barrels. While Syria is neither a significant oil producer or strategically positioned to control oil trade routes, its neighbouring countries are. Concerns over other Middle Eastern countries being engulfed in the conflict should the UN intervene in Syria, is helping keep prices elevated. At the same time as inflows totalled US$47.1mn into long Brent ETPs, ETFS Daily Leveraged Natural Gas (LNGA) suffered US$7.6mn of outflows as an unexpected rise in inventories weighed on prices. However, the potential for an intensification of Atlantic hurricane activity could help keep prices supported over the next few weeks.

Price weakness prompts the fourth consecutive weekly inflows into coffee ETPs. Despite a bumper harvest in Brazil, which has so far more than compensated for leaf-rust hit Central American crops, investor inflows reached US$2mn last week. The depreciation in the Brazilian real against the US dollar has led to farmers maintaining sales despite falling coffee prices. The Brazilian government has offered put options to buy up to 3 million 60kg bags at R$343 ($149) a bag, which temporarily boosted prices at the beginning of August. However, the price rally was short-lived and over-supply is still likely to keep prices depressed for the season.

Key events to watch this week. The Syrian crisis will likely remain in focus for energy markets, with the EU voting on a possible resolution on Thursday. Oil prices are likely to continue benefit from the uncertainty in the Middle East and from reduced production. China August industrial production and July retail sales will also be monitored to assess the strength of the economy after the recent positive manufacturing data.


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