ETPs See Largest Inflows in Nine Months on Growing Supply Deficit

Comments from likely future Fed Chairman Janet Yellen, together with poor euro-area GDP growth numbers and weak inflation, indicate that central banks may keep the taps open longer than many investors are expecting.….

ETF Securities Research

The news took some of the steam out of US bond yield rises and helped drive the gold price higher. News from China’s Third Plenum meeting was viewed positively by markets, with an increasing emphasis on private sector-led growth, a loosening of the one-child policy, encouragement of rural land rights reform and other legal changes to boost urbanisation, and policies to reduce overcapacity in key sectors (including commodity production) helping to drive a rally in local markets. In our view, increased urbanisation, more well-balanced private sector-led growth and a consolidation of inefficient commodity production should help support long-term commodity price appreciation.

Palladium ETPs see $20mn of inflows, the largest since February. Last week Johnson Matthey released its Platinum 2013 Interim Review. In the report they affirm their expectation that the palladium market will remain in deficit in 2013, adjusting their deficit forecast to 740koz from 850koz. Johnson Matthey also forecasts that the platinum deficit in 2013 will be the largest in 14 years (605koz) and that the deficit will continue into 2014 as tightening emission controls boosts demand for the metal in diesel autocatalysts and Chinese jewellery demand continues to gain traction. We remain bullish both palladium and platinum prices.

Gold ETPs see largest weekly outflows since September. Long gold ETPs saw US$159mn of outflows last week as risk assets such as equities rallied higher and investors followed through on selling sparked by higher bond yields on the back of the previous week’s strong October payroll numbers. However, toward the end of week, following the release of Yellen’s dovish speech on her views on monetary policy, much of this bearish sentiment appears to have dissipated.

ETFS Copper (COPA) saw US$19mn of outflows as Chinese output of the metal rises. Investors reacted negatively to news of Chinese output of copper rising 23% to 637,000 tonnes in October from a year earlier. However, in our view a domestic demand will continue to absorb most of the metal being produced as has been reflected in continued strong China copper import growth and declining global copper inventories. We expect the copper price will be forced higher in the coming months.

ETFS Brent (OILB) sees outflows as investors sell into price strength. Brent oil rose 4.9% last week on news of on-going supply problems in Libya. Protests and strikes are expected to have reduced oil output down to a fraction of its pre-crisis (February 2011) levels of 1.65mn bbl/d. It is unlikely this situation will reverse in the near term, helping shore up the Brent oil price. We continue to expect oil to trade in a relatively narrow range.

Coffee ETPs see inflows as investors are attracted by near 5 year price lows. The price of Arabica coffee fell 1.3% last week, bringing declines to 29% so far this year as the oversupply has been exacerbated by a larger than expected harvest in Colombia. With prices at a five-year low, many investors see current prices as an attractive entry point.

Key events to watch this week. This week, markets will likely focus on the Chinese, US and euro-area Markit manufacturing PMIs to gauge the strength of the global recovery. Minutes from the latest FOMC and BoE policy meetings will give insights into central banks’ views on extending policy accommodation. EU car registration data due at the beginning of the week will be closely watched to see if the growth we saw last month was an aberration or the start of a positive trend.




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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