ETP Weekly: Risk hedges in favour on heightened geopolitical risks

Geopolitical risks remained in focus last week, with the Ukrainian crisis somewhat worsened by the resignation of the Ukrainian Prime Minister, while the unrest in the Middle East threatened to get out of hand. According to the IMF, the conflicts in Ukraine and Iraq will likely hinder global growth, which is now forecast to be around 3.4% vs 3.6% predicted back in April….

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While prices are yet to react to the heightened risks, gold and oil ETPs continued to see strong inflows as investors seek hedge against a further deterioration of the situation.

Gold and oil ETPs continue to see strong inflows on geopolitical risks. The Ukrainian crisis and unrest in the Middle East prompted investors to seek a potential hedge against a deterioration of the situation, driving US$80.6mn and US$23.1mn into gold and oil ETPs, respectively. While prices are yet to react to the heightened risks, with the Gaza conflict threatening to escalate following an Israeli missile attack on a UN school for refugees and the Ukrainian Prime Minister resigning, demand for oil and other defensive assets is likely to remain strong.

Long platinum ETPs record US$6mn of inflows on relative value prospects. The platinum to palladium ratio is standing at the lowest level since 2002, despite a South African strike that took over 1moz of platinum off the market. While palladium price is better positioned to benefit from a pick-up in global growth, investors deem the current platinum undervaluation excessive and anticipate platinum playing catch up to palladium.

Expectations of a prolonged ore export ban in Indonesia drive inflows into ETFS Nickel (NICK) to an 8-week high of US$12.8mn. Joko Widodo won the Indonesian presidential election and is due to be sworn into office on the 20th October. While his election might bring a relaxation of the export ban in place since January 2014, it is unlikely that any change will be carried out before next year, meaning that nickel market will remain tight for some time. With Indonesian industrial metal supply substantially reduced by the ban we expect industrial metals to continue being supported as global demand begins to pick up. Cyclical commodities demand is being driven by the Chinese government’s stimulus measures and a quickening pace in the US recovery.

Wheat ETPs see US$6.4mn of inflows as the recent price correction is deemed excessive. The Australian Bureau of Meteorology expects below average rainfall in the north-eastern and south-eastern wheat growing areas over the next few months. Investors are building positions in the hope that the large surpluses forecasted by the USDA prove wrong, which could lead to the next price rally. At the same time, profit taking drove US$2.5mn out of ETFS Daily Leveraged Coffee (LCFE), as the Arabica coffee price jumped by over 10% last week. Heavy rains at the tail end of the harvest in Brazil, the biggest producer, could lower the quality of the coffee beans that are currently being harvested.

Key events to watch this week. While investors focus will likely remain on the evolving situation in the Ukraine and the Middle East, a number of key economic statistics for the US and China will also be monitored to gather the strength in momentum in those economies. July Manufacturing PMIs for China, the US and the UK will be coming out this week, together with Q2 US GDP growth and July non-farm payrolls. The US FOMC rate decision will also be watched closely as investors try to identify the future path for rates in the US.


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