Minutes from the October FOMC meeting revealed continued discussions about how and when to taper the US$85bn monthly asset purchase program without causing a dramatic tightening of financial conditions……….
ETF Securities Research
Despite this having been under discussion for months now, the dollar rallied and most metals prices fell sharply on the release of the minutes.
A lower than expected China Markit PMI also contributed to the generally bearish sentiment towards more cyclical commodities. In our view healthy demand growth in the US and China, continued ample global liquidity, and prices that have adjusted to expected increases in supply and are now near production costs, should support commodity performance in 2014.
Long platinum ETPs see the largest outflows in 9 weeks despite impending energy shortage in South Africa. Eskom, South Africa’s main electricity producer, is struggling to generate enough power to supply South Africa’s industries. South Africa’s lack of adequate infrastructure was the basis of Eskom’s power shortage in 2008, which caused platinum prices to jump 62% to an all-time high of US$2,250oz from October 2007 to March 2008. With Johnson Matthey forecasting the biggest platinum deficit in 14 years, we remain bullish PGM prices, as tightening emission controls boosts demand for the metal in diesel auto catalysts and Chinese jewellery demand continues to gain traction.
Gold ETPs see another week of outflows as price slides to the lowest level since July. Expectations the US Fed will proceed with tapering its US$85bn program in coming months as the economy continues to improve weighed on precious metal prices last week. While bullish momentum has driven key equity benchmarks to new records, if
the optimism begins to fade, gold and silver are likely to benefit, as investors look to buffer portfolios against any market reversal. Gold also will act as a hedge if optimistic US growth expectations are missed.
Short Copper ETPs see US$17mn of outflows as copper prices slip to a 3-month low on the back of increasing Chinese production. We believe prices will rebound as the market appears more balanced than widely perceived. Falling inventories on COMEX and LME, along with reports of declines in bonded warehouse stocks, indicate that demand is strong. Meanwhile, ETFS Aluminium (ALUM) recorded US$2.0mn of inflows last week on improved outlook following China’s 3rd Plenum. China’s renewed focus on letting markets play a “decisive” role in allocating resources could see some over-supplied commodities, like aluminium, rationalise over the coming years, helping to support prices.
Long natural gas ETPs see the largest outflows since September on profit taking. The Henry Hub natural gas price rose 2.7% last week on colder weather expectations for the US East Coast. With the price still relatively subdued, inventories below last year’s levels and the potential for this winter in the US to be colder-than-usual, we expect
the natural gas spot price to rally back to US$4.50/MMBtu in Q1 2014.
At the same time, long WTI crude ETPs registered US$4.6mn of inflows on expectations stronger US growth will lead to a pick-up in US oil demand.
Key events to watch this week. This week, markets will likely focus on Chinese lead indicators and industrial profits after last week’s disappointing PMI numbers. UK Q3 GDP will also be watched, together with a number of European statistics, including unemployment rate and CPI. India Q3 GDP and fiscal deficit will conclude the week. US markets will be closed on Thursday for the Thanksgiving holiday and trade is likely to be light on Friday.