Precious metals rallied sharply following the last week’s disappointing US non-farm payrolls, paring the losses sustained earlier in the week. While the employment result was likely weather affected, investors weighed the possibility of the…
ETF Securities Research
Fed moderating their expected stimulus tapering schedule, sending the US Dollar lower. While we expect tapering to continue at a modest pace throughout Q1 2014, the USD weakness benefitted cyclical commodities like industrial metals. With the ECB pledging to do “whatever it takes” to sustain the Eurozone recovery and the US recovery remaining on track, we expect commodity price gains to be sustained. Despite commodities underperforming developed market equities in 2013, healthy demand growth in the US and China, disappointments to current highly optimistic supply forecasts for a number of key commodities, and continued ample global liquidity should support commodity prices in 2014 in our view.
ETFS Copper (COPA) registered US$98.3mn of inflows, matching the record seen in 2012, as price hit a 2-week low. Worries about China’s economic strength weighed on the copper price last week, after a good start to the year. Lower-than-expected Chinese December exports and HSBC/Markit PMI prompted fears of a slowdown in the Chinese economy, partly erasing the price gains accumulated over the past month. However, we believe those fears are unfounded and expect the Chinese economy to continue to grow at a healthy 7-8% rate this year. With copper global inventories at the lowest level since November 2012 and Chinese imports showing renewed strength, we expect the copper price to continue higher. Meanwhile, ETFS Zinc (ZINC) saw US$8.5mn of outflows last week, as subdued demand weighed on price.
Gold and silver ETPs see strong outflows on continued concerns about Fed tapering. Continued strength in the US economy prompted the US Fed to start tapering its bond purchasing programme in December, highlighting a decline in the marginal efficacy of those purchases. However, non-farm payroll numbers on Friday surprised on the downside, with only 74,000 new additions, prompting a rally in precious metal prices and casting some doubt on the timing of tapering of the Fed bond buying programme.
Long WTI crude ETPs see US$19mn of inflows, the most in over a year, as EIA revises oil demand expectations upwards for 2014. According to the EIA, global oil demand will grow by 1.2mn barrels per day in 2014, 20% higher than previously estimated, with half of the anticipated growth coming from the US. Strong imports from China in November also contributed to the positive mood towards WTI crude last week. At the same time, long natural gas ETPs saw US$3.6mn of outflows on expectations of mild weather conditions in the coming weeks. On the week ending 3 January the EIA reported another 157bcf withdrawal, bringing US inventories to around 10% below their 5-year average. We believe this supply tightening is now fully factored into the price and that supply conditions will slacken in the coming months.
Long coffee ETPs record outflows of US$6.4mn on profit taking. Arabica coffee price jumped over 7% last week on expectations of a smaller crop from Brazil, the world’s largest grower, in 2014. Bad weather conditions and a decrease in planting area are to blame for the drop in expected production. Coffee ETPs generated substantial interest last year, with over US$100mn of inflows into ETFS coffee products. Meanwhile, ETFS Daily Leveraged Wheat (LWEA) saw US$1.1mn of inflows as price slid to a two year low on expectations of rising output.
Key events to watch this week. This week the focus will likely be on US economic statistics with industrial production, retail sales and CPI coming out. Should US economic data start to soften, the Fed could slow the pace of its tapering, keeping precious metal prices supported.