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.