Ukraine in focus as markets wobble, defensive assets rally

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.


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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.

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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.

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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.




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.

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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.

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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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