US payrolls surprised to the upside and China growth data also came in above expectations, creating a strong base for continued gains for cyclical assets. At the same time, the ECB cut its benchmark refinancing rate by 25ps to 0.25% sending the Euro sharply lower.….
ETF Securities Research
The cut followed the release of October CPI showing that Eurozone inflation fell to 0.7% in October, the lowest level in nearly four years. While a stronger USD may continue to create headwinds for the gold price in the near term, we expect most other commodities and cyclical assets to benefit as the main reason for US dollar strength is the strength of the US (and global) economic recovery, which is positive for the more industrially-oriented commodities. We remain particularly positive copper and lead in the industrial metals sector and platinum and palladium within precious metals.
Long natural gas ETPs see third consecutive week of strong inflows, as investors appear to view recent price decline as excessive. Last week ETF Securities natural gas ETPs saw $15mn of inflows, bringing total inflows over the past three weeks to $41mn. Henry Hub gas prices have been falling on the back of warmer-than-normal temperatures in several parts of the US. However, with prices now back near the lower end of recent trading ranges and forecasts that US winter temperatures will be colder than usual, investors appear to be using the price declines as a good entry point.
Platinum and palladium ETPs receive combined inflows of almost US$10mn on a tighter market outlook. Strong manufacturing and growth numbers from China and the US, coupled with persistent supply uncertainty in South Africa, spurred PGM prices last week. US GDP growth and job numbers also came in higher than expected. With both markets expected to record a deficit this year we believe both platinum have positive price prospects.
Long gold ETPs record the biggest inflows in 10 weeks, totalling US$7.6mn, as investors remain concerned about the outlook for the Eurozone and a potential excessive rally in cyclical assets. With France’s credit rating cut to AA by S&P and the ECB having to deal with extremely low inflation and high unemployment, tail risks in Europe remain elevated, prompting investors to seek protection in gold. The extent of the recent rally in equity markets may also be starting to worry investors, causing some reallocations into gold as a hedge.
ETFS Aluminium (ALUM) saw US$57.9mn of outflows as investors remain concerned about continued large global aluminium surpluses. China is expected to produce a record 24mn tonnes of aluminium this year, according to Chalco, China’s largest producer. With China continuing to increase capacity instead of cutting production, prices have remained under pressure. Meanwhile, ETFS Daily Short Copper (SCOP) saw US$9.7mn of inflows last week.
Key events to watch this week. Industrial production numbers for India, Japan, EU and the US will be released this week, with better than expected data likely to benefit cyclical commodities. Q3 GDP data for the Eurozone, Germany and France will also be published this week providing a clearer picture of the extent (or lack thereof) of the European recovery. The Eurozone Finance Ministers meeting will also be monitored closely as Europe remains the biggest risk to global stability. Perhaps of greatest market interest in relation to the longer-term commodity outlook will be any new policy initiatives announced following China’s Third Plenum meeting.