Overview: The political turbulence in the Ukraine and Russia sent prices of defensive assets such as gold, silver, the Japanese yen and Swiss franc higher. Concern the global economic recovery may not be a “straight-line” affair has also been….
ETF Securities Research – Nitesh Shah, Director – Research – ETFSecurities
helping defensive assets such as gold rise this year after sharp declines last year. Data from the US has been mixed, with Q4 GDP figures revised down but housing market data coming in much better than expected. The drought in Brazil sent soft commodities higher, although some of the recent gains appear overdone and we anticipate prices will have to correct – with Arabica coffee especially vulnerable in our view. Equity markets will have a lot to digest this week with the situation in Ukraine reducing risk appetite and US payrolls and ISMs key to views on the sustainability of the US economic recovery.
Commodities: Drought conditions in Brazil spur soft commodities higher. The sugar price rose 8.2%, coffee rose 5.8% and soybeans rose 3.1% last week as investors assess the impact of the drought. Year-to-date however, the gains in sugar and soybeans pale in comparison to Arabica coffee which has returned 62% (compared to 6% for sugar and 6% for soy beans). That is in part driven by the higher concentration of coffee production in Brazil (45% of global supply versus 25% for sugar and 31% for soybeans) and also to large short covering. However, we believe coffee prices have overshot and will likely fall from current levels. The natural gas future price dropped 25% last week on expectations of lower demand for the coming month. The May contract however, showed a more modest fall of 4.2%. The gold price rose 1.1% on political turbulence in Ukraine. If the situation deteriorates, further gains seem likely.
Equities: Nuclear energy received another boost on the reversal of Japan nuclear policy. The Japanese government made a U-turn last Tuesday by announcing the restart of its nuclear programme, reversing the previous government’s decision to shut all the plants following the disaster at Fukushima. Over the past week to Thursday, the WNA Nuclear Energy Index rose nearly 3% adding to the 8.2% rally over the past month. Global equities, traded sideways to down last week ahead of upcoming manufacturing data in Europe and the US and political uncertainty in the Ukraine. The situation in Eastern Europe with leaders of the G7 nations condemning Russia’s attempt to invade Ukraine will likely increase the level of volatility in the financial markets over the coming weeks.
Currencies: Chinese Renminbi in focus ahead of National People’s Congress. The USD gained against the Renminbi last week as the Chinese Central Bank raised the fixing rate to the highest level since October 2013. It appears officials are signalling that currency flexibility is a key pillar of the reform process. The critical change will be if there is a change to fixing policy at the NPC. Meanwhile, several western central banks are meeting next week. The European Central Bank has the biggest decision to make, with growth still sluggish and deflationary pressures coming from Germany and the periphery. Euro strength would unravel with any additional stimulus from President Draghi. The AUD could also suffer, with weak activity potentially prompting the RBA to deliver more stimulus.