ETP Weekly : Palladium ETPs see Surging Inflows on Concerns of Russia Export Restrictions, says ETF Securities

The Ukrainian crisis remained in focus last week, with the European Union joining the US in imposing sanctions against Russia. Concerns that Russia may face trade restrictions drove strong inflows into palladium ETPs last week….

ETF Securities Research

as Russia accounts for over 40% of global production of the metal and a deficit is already foreseen in 2014. Gold sold off following more hawkish than expected comments from new Fed Chairman Janet Yellen, though ETP investors held firm. While fears of a slowdown in China continued to weigh on industrial metals last week, heating oil and sugar attracted tactical allocations by investors.

ETFS Physical Palladium (PHPD) receives the biggest inflows in almost a year, totalling US$68mn, on supply restriction fears. Russia is the world’s biggest producer of palladium, with 42% of supply coming from the country. Any restrictions on Russian palladium exports would exacerbate what is already expected to be a large palladium deficit in 2014. At the same time, South African strikes are entering their 9th week and no industry-wide resolution has been found yet. While Amplats signed an agreement with the National Union of Metalworkers of South Africa (NUMSA) on Thursday, the Association of Mineworkers and Construction Union (AMCU), by far the largest union at Amplats’ operations, is still on strike. South Africa is the 2nd biggest producer of palladium with 37% of global production and the largest producer of platinum.

ETFS Daily Short Heating Oil (SHEA) sees US$9mn of inflows as cold weather in the US subsides. At the same time, investors are becoming increasingly negative Brent oil, with long Brent ETPs seeing US$2.6mn of outflows last week. We expect the WTI-Brent crude spread to continue narrowing as the upcoming US driving season boosts US oil demand, in turn lifting the WTI price while a reduction in the geopolitical risk premium puts downward pressure on Brent.

Supply glut prompts US$33mn of outflows from long aluminium ETPs. The aluminium market has been in a surplus for the past 9 years, according to the World Metal Bulletin Statistics (WMBS) and consensus is that this trend might continue into 2014. Although Russia is the 2nd biggest producer of aluminium, with 9% of primary supply coming from the country (as of 2012), abundant supply and elevated stockpiles have so far prevented the price from rising despite the increased risk of trade sanctions against Russia. At the same time, profit taking drove US$3.6mn out of long nickel ETPs, as the price has jumped over 10% in the past month. Supply constraints in Indonesia and potentially Russia are likely to continue support prices in the near-term.

Long Arabica coffee ETPs see another week of outflows as price drops on improving weather conditions in Brazil. Rainfall is expected over the next few days in Brazil’s top producing state and it is likely to improve crop conditions. Earlier in the year, the price of Arabica coffee jumped to a 2-year high on drought conditions in Minas Gerais, Brazil, where the rainfall deficit in Jan/Feb was the worst since at least 1950. Since then, prices have plummeted 15% as rain has resumed in key growing areas. With weather conditions changing and the potential for an El-Nino weather event to boost supply in coming months, we expect prices to decline back to recent support levels around 1.55 per pound. Meanwhile, investors are increasingly becoming negative on sugar, with ETFS Daily Short Sugar (SSUG) receiving US$2.1mn, on a better Brazil crop outlook following rain in Brazil..

Key events to watch this week. US Markit manufacturing PMI, retail sales and Q4 GDP data will also be watched closely to gauge the strength of the US recovery and the pace of Fed tapering.





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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