Strong China growth adds support to cyclical asset rally

Overview: After a weak start to the week, equities re-gathered momentum as global growth data bounced back at the end of the week. Gold miners rallied nearly 6% as the gold price rose and sentiment towards miners continues to improve….

ETF Securities Research

Industrial metal prices also rallied strongly as Indonesia’s ban of mineral ore exports came into effect. Today’s better-than-expected Chinese Q4 GDP release reinforces that trend.  Improved European car sales helped lift the price platinum group metals last week as the market braced itself for yet another miner strike in South Africa.  In currencies, cyclically linked currencies like the Swedish Krona and the New Zealand Dollar posted the strongest performance, mainly against the British Pound. AUD is likely to join the trend this week with continued strength of the Chinese economy likely to be supportive.
Commodities: Industrial metal prices rose across the board last week as Indonesia’s ban of mineral ore exports came into effect, which could see the supply of several metals tighten this year. Stronger-than-expected economic activity also lifted investor sentiment toward cyclical assets. Although the mineral ore export ban has been watered down from its original proposal, exports of ores for use in nickel pig iron are affected.  Nickel prices rose 8.4%. Precious metals also rose across the board despite the stronger US dollar. Improved European car sales, after an extended period in the doldrums, helped lift the price platinum group metals last week as the market braced itself for yet another miner strike in South Africa. Natural gas prices rose 8.6% as EIA data confirmed that that natural gas storage withdrawals had beat the prior record set in December as result of the extreme cold weather.
Equities: Global equities back on the uptrend as positive growth indicators revived market’s appetite for cyclical assets. US equities started last week on a negative note following the previous Friday’s weak US non-farm payroll. However, better-than-expected industrial production data in Europe and the US combined with UK retail sales strong 2.8% growth against the expected 0.3%, managed to put global equities back on the upward trend. European leveraged equity indices jumped 4.6% on average over the past week to Thursday while the DAXglobal® Gold Miners Index surged 5.7% on the back of investors’ continued appetite for cyclical assets and gold price 1.3% increase over the same period. We expect current momentum to remain for the coming weeks.
Currencies: AUD forming base as cyclical bulls push SEK and NZD to top performance. With the exception of the Australian dollar (AUD), cyclically linked currencies like the Swedish Krona and the New Zealand Dollar posted the strongest performance, mainly against the British Pound. AUD is likely to join the trend this week with continued strength of the Chinese economy likely to be supportive, despite the softer fundamental backdrop in Australia. The AUD could show surprising strength against the Euro in the week ahead, especially if the Eurozone manufacturing numbers fail to show that the region remains on a recovery path. While we expect a cyclical recovery to continue, we feel that this will benefit the US Dollar given the potential development of liquidity reduction. In this light we would suggest long cyclical currencies against the Euro given the ECB remains in ‘whatever it takes’ mode.
Source: ETFWorld.fr

Commodities 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.
Equities 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.
Currencies 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.