ETP Weekly: A week of two-halves saw outflows from profit-taking and tapering fears

It was a week of two halves, with precious and industrial metals generally rallying in the first half of the week followed by a fall on Thursday as the markets switched to a ‘wait-and-see’ mode ahead of the Fed’s FOMC policy meeting this week….

ETF Securities Research

Some investors saw the budgetary compromise approved by the House of Representatives as another reason for the Fed not to wait till 2014 to taper its bond buying programme. Strong retail sales numbers also pushed more investors into that camp. We believe that the Fed is still looking for a broad range of indicators to be positive before it changes its policy direction and would rather wait for further confirmation of stability in the beginning part of 2014.

Profit-taking drives US$30.8mn from natural gas ETPs as price jumps to two-year high. The Henry Hub natural gas price rose 6.7% to US$4.4MMBtu last week as natural gas inventories fell 81bcf, which is 3.5% below its 5-year average. A colder-than-expected winter snap led to a substantial increase in Northeastern price points and a 33% increase in natural gas consumption compared to the week before. At the same time, supply of dry gas fell by 3.3% following well freeze-offs. The EIA expects this winter to be colder than the last, which could lead to persistently higher gas prices this season.

ETFS Copper (COPA) saw US$6.0mn of inflows as the copper price rose 2.5%. Most industrial metal prices rose last week as fears of over-supply slowly started to retreat and the global recovery appears to be gaining traction. Eurozone manufacturing PMIs reached a 31- month high and although China’s (Markit) manufacturing PMI fell slightly short of market expectations, it remains firmly in expansionary territory. ETFS Daily Leveraged Nickel (LNIK) attracted US$0.3mn of flows following a 1.9% gain in price. Meanwhile profit-taking drove US$8.3mn out of ETFS Zinc (ZINC), after a 4.3% gain in price. With Indonesia still planning to ban mineral exports (i.e. before being processed) from next month, supplies of industrial metals could remain tight at the beginning of 2014. Indonesia is the world’s largest exporter of nickel and refined tin.

Gold ETPs continued to see outflows as uncertainty on the timing of Fed tapering preoccupies investor minds. There was US$96.3mn of outflows from gold ETPs last week. Although gold prices rose just over 2% in the beginning part of the week, these gains were quickly given back as investors began to focus on the implications of the FOMC meeting next week. Should the Fed decide to taper on this side of the calendar year, the scale of dollar debasement will subside, providing some investors less incentive to hold gold as a store of value.

Agricultural basket ETPs saw US$15.1mn of outflows as several softs rebound. Investors took profit as the price of cotton rose 6.7%, coffee rose 5.0% and cocoa rose 1.3%. The USDA slightly revised downward its cotton production estimates for China. After having hit a seven-year low, coffee prices started to rebound last week. With net speculative shorts having come close to a ten-year high in November, the price is benefiting from a short-covering rally. Whether the gains will be sustained will depend on whether the on-going Colombian harvest can stop outshining initial expectations and if Brazil can slow down exports.

Key events to watch this week. The FOMC meeting will steal the limelight this week and investors will keenly watch the US CPI numbers out on Tuesday to gauge whether there is any urgency in the Fed tapering its bond buying programme. Meanwhile the flash Markit manufacturing PMI for the US will provide further guidance to the strength of the global recovery.




Although gold often gains during extreme events, the start of the first US Federal shutdown in seventeen years last week failed to lift the gold price. Investors appear to be looking through the storm and are focused on assets that will either benefit from the continuation of the global growth recovery or are generally uncorrelated with debt risk.  Cotton and sugar gained 2.3% and 1.8% last week, bouncing from lows hit in September, but without strong news driving the trend. Platinum and palladium fell 3.6% and 2.5% respectively. That comes despite a 17% rise in Japanese auto sales (to a 14-month high) and a 12.1% rise in UK car sales (to a five-year high). US car sales also remained brisk, despite the timing of Labor Day distorting the monthly statistics. Autocatalyts are the primary source of demand for the platinum group metals (PGMs). The strike that started two weeks ago was still on-going last week at Amplats, constraining the supply of PGMs.

    MA Weekly 07.10.13 1


US equities remain under pressure as the negotiations over raising the US debt ceiling continue. The S&P 500 fell for the second consecutive week as Republicans and Democrats continued to fight over the budget and debt ceiling. European equities have also been sensitive to the political turmoil in the US. The Euro Stoxx 50® Investable Volatility Index, which provides exposure to the forward implied volatility of the Euro Stoxx 50® Index, surged 5% last week, followed by the FTSE® MIB Super Short Strategy Index and the ShortDAX® x2 Index, up 3.5% and 1.4% respectively. Global equities are likely to remain volatile and under pressure as we get closer to the estimated 17 October hard deadline for lifting the debt ceilding.

MA Weekly 07.10.13 2


Safe haven currencies benefit as US fiscal negotiations drag on. The Japanese Yen (JPY) was the best performing G10 currency last week as investors sold risky assets and paid back JPY loans on growing concern about the lack of progress on US fiscal and debt negotiations.  For similar reasons the Swiss Franc (CHF) and even the Euro (EUR) also rallied against the US dollar last week. The British Pound (GBP) held up, continuing the trend of the past three months. However, towards the end of the week the currency showed some weakness, indicating the rally may be peaking. In our view, the GBP is one of the more overvalued G10 currencies and – despite recent rhetoric – has one of the more dovish central banks. We therefore believe the currency is particularly vulnerable to a sharp drop once growth data stop surprising to the upside.

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