Investors have remained cautious ahead of the looming FOMC meeting this week, with most commodities trading narrow ranges ahead of the announcement. Gold has been the commodity most under pressure as real interest rates have risen sharply in…
ETF Securities Research
recent months in response to expectations that the Fed will move to reduce its bond purchase program.
While the US economy is strengthening, it does not appear to be at a self- sustaining point and inflationary pressures remain in check – two reasons that could give the Fed some leeway to continue its stimulus program. In our view, while a degree of tapering is already priced into financial markets, the accompanying statement will be critical to the performance of asset markets. With the consensus clearly favouring some ‘tapering’ activity, the alternative scenario will be the Fed keeping the status quo.
Commodity prices, particularly gold and silver, would benefit under such a scenario, with the US dollar likely to weaken as the monetary taps remain wide open. Cyclical commodities, like industrial metals, have been in favour on recent evidence that the global recovery is gaining pace.
Cyclicals are likely to remain in vogue, even with a modest amount of ‘tapering’, as the on-going rise in industrial activity both in the US and Asia continues.
ETFS Copper (COPA) posts strong back-to-back inflows as Chinese growth remains buoyant.
COPA received US$12.1mn last week, after inflows hit an 11-week high a week earlier, as the Chinese economy continues to show robust growth. Industrial production and retail sales readings posted upside surprises, helping support cyclical commodities, particularly industrial metals prices. In contrast, ETFS Short Aluminium (SALUM) received record inflows on a softening fundamental outlook.
With global aluminium production currently hitting record highs, prices are likely to remain well contained with abundant stockpiles.
Outflows from gold ETPs reach 5-week high. Rising expectations of reductions of the Fed’s bond purchase program has weighed on the gold market (and silver by association) in recent weeks, prompting US$143mn of outflows last week. With the Fed expected to gradually rein in its monetary stimulus, precious metals are likely to remain under pressure in the near term, barring any re-emergence of the structural problems afflicting the Eurozone. Indeed, the upcoming US debt ceiling could prompt investors to reassess sovereign exposures on a global basis.
Easing of geopolitical risk prompts oil outflows. The geopolitical tension surrounding the Syrian situation has begun to subside, with investors withdrawing US$11.5mn from long oil ETPs. The deal struck between Russia and the US regarding Syrian chemical weapons is likely to keep downward pressure on oil prices in the near term. Additionally, supply remains strong, particularly in the US, with production reaching the highest in over two decades. Reinforcing the strong supply outlook, the IEA has upped its production estimates for 2014, on the back of expectations for further US production gains. Meanwhile, Saudi Arabia has reiterated its commitment to backstopping any near term production shortfalls from OPEC producers.
Coffee ETPs received record inflows, totalling US$31.6mn. Forecasts of drier weather conditions lifted prices, with investors concerned over crop damage in Brazil. Expectations that this year’s record coffee harvest in Brazil also took a hit as the country’s forecaster, Conab, reduced production estimates for 2013.
Key events to watch this week. All eyes will be firmly focussed on the FOMC meeting that concludes on Wednesday. In Europe, German ZEW will show how optimistic investors are, while UK retail sales will give clarity on the sustainability of the recent strong rebound in activity.