China’s latest stimulus – cutting its repo rate – has helped support industrial metals and a solid GDP result this week will give more impetus to commodity markets. Chinese commodity exports rebounded in March in another sign of a stabilization in demand and going into a strong seasonal period, cyclical commodities like industrial metals, should be well supported……
Defensive commodities like gold will be in the spotlight this week, as investors look ahead to Eurozone CPI and the US retail sales data releases to gauge the pace of policy divergence in 2015. Eurozone CPI releases will be key for this week’s ECB meeting discussions.
Industrial metals see fifth consecutive week of inflows. Value investors appear to be wading back into the industrial metals space, with inflows totaling US$85mn over the past five weeks. Investors are becoming more optimistic about the outlook for the Chinese economy following its latest cut in interest rates in order to support activity. ETFS Copper (COPA) has been the main beneficiary, receiving around a third of total inflows over the past month, totaling US$28mn. Chinese imports of unwrought copper jumped by over 45% in March from February, in an indication of the tightening underlying market. While down around 2% on a year ago, Q2 is strong from a seasonal perspective and imports could continue to strengthen.
Silver price drops back to attractive level, prompting inflows as gold sees more outflows. ETFS Physical Silver (PHAG) experienced the second consecutive weekly inflows, totaling US$13mn over the period. The inflows are the largest biweekly inflows in two months and come as silver dipped to the lowest level in three weeks. With the link between silver and gold remaining strong, any further increase in volatility should support prices. While we believe that a US$15-16/oz price level is a buying opportunity, the market remains plagued by years of oversupply. Nonetheless, investors appear to be seeing silver from a strong relative value perspective and if inflation expectations in the Eurozone continue to move lower this week, both gold and silver could be key beneficiaries.
Long WTI ETPs see largest outflows since 2010, ahead of US weekly inventory data. A strong rally in crude followed the announcement of price hikes from Saudi Arabia to its Asian clients in addition to a lack of clarity over the potential ramp up in production from Iran following a potential nuclear deal being agreed. Investors took the opportunity to take profit, with crude ETPs withdrawals totaling US$73mn last week. In contrast, net long positions in WTI futures reached the highest level since August 2014. With US crude production continuing to defy depressed prices – the EIA’s weekly report showed the build in inventories last week was nearly three times larger than expected, at nearly 11mn barrels – near term downside risk remains elevated.
Key events to watch this week. Commodity investors will be closely watching the GDP release from China to determine whether the slowdown is more pronounced than expected. We feel that stimulus can support activity so growth remains resilient around the 7% level in 2015. Retail sales will be the next signpost to gauge whether the US economy is strong enough to support the beginning of policy tightening this year. Ahead of the ECB meeting, Eurozone inflation readings will also be critical for defensive commodities like gold and silver.