Chocolate makers to benefit from cheaper cocoa prices

Chocolate makers to benefit from cheaper cocoa pricesChocolate makers to benefit from cheaper cocoa prices

Cocoa is expected to go back into a supply surplus this year. The surplus will be highest in six years and will weigh on prices. Confectioners, who only last year were reducing the chocolate content of their bars, may be less thrifty this year. Chocolate makers to benefit from cheaper cocoa prices Favourable weather has promoted a good cocoa crop this year in Africa. 70% of global cocoa comes from Africa. The main crop, which contributes to about 80% of the total annual harvest in Africa is be complete in March. The International Cocoa Organization (ICCO) yesterday released its supply and demand forecast for 2016/17, showing a return to a production surplus. Seasonal ‘Harmattan’ winds that threaten to damage the crop failed to materialise and its absence has reversed the supply deficit that the market had initially assumed. Cocoa prices have fallen by 40% and speculative positioning has fallen to an all-time low. The ICCO forecasts that supply will increase by 14.8% to an all-time high of 4.6 million tonnes in 2016/17. Meanwhile demand will only rise 2.9% to 4.2 million tonnes. Near-term pressures remain on cocoa prices. While port deliveries of cocoa at Ivory Coast have not risen substantially yet, that is due to a disruption with exporters. A number of local exporters who bought cocoa – expecting its price to rise – have defaulted on contracts. That cocoa is piled in warehouses, waiting to be re-auctioned. Once that cocoa is sold the elevated output is likely to enter global supply. Following the dramatic 40% decline in cocoa prices since August 2016, we believe that demand could make a stronger comeback this year than the ICCO anticipates. In 2016, a number of confectioners reduced the cocoa content of their chocolates in an effort to reduce their costs amid high cocoa prices. Now that cocoa prices have declined, we could see a reversal of that strategy. Consumers concerned that that their Easter eggs will be light on chocolate need not worry with prices this low. (Click to enlarge)

Nitesh Shah, Research Analyst at ETF Securities

Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).

Largest monthly inflows into Robotics ETPs since creation

Largest monthly inflows into Robotics ETPs since creation

ETF Securities Weekly Flows Analysis – Largest monthly inflows into Robotics ETPs since creation

  • Robotics ETP saw US$52m of inflows since the beginning of the month, the largest monthly inflows since its creation.
  • Energy ETPs outflows suggest investors are taking profits.
  • Cocoa prices have reached a multi-year low, becoming appealing for technical buyers. We saw US$5.6m of inflows last week.

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Thematic equities such as Robotics and cyber security saw US$27.3m inflows last week. Robotics remain in favour, with inflows year-to-date totalling US$81m from which US$52m of inflows month-to-date.

Energy ETPs saw US$23.3m flows withdrawal last week as investors took profits. The International Energy Agency (IEA) said on Friday that oil supplies fell by around 1.5m barrels per day (bpd) last month, including by 1m bpd reduction from OPEC. The OPEC cut compliance of 90% of pledged oil output curbs in January. However, the massive increase in US crude oil imports (to a four and a half year high) and the trend increase in rig count in the US partly offset the reduction in oil supply, suggesting energy prices overextended recently. Investors took profits as there is a limited upward potential in prices over the medium term.

Inflows into gold ETPs continue as price returns to November 2016 levels. We saw US$8.2m inflows into gold ETPs as the price of gold briefly touched US$1240/oz (up from US$1220/oz the week before). The 10bps decline on 10yr US Treasuries yields at the beginning of last week supported gold. We believe that the high degree of geopolitical uncertainty will limit downward pressures on gold prices.

Strong inflows in cocoa of US$6.4m last week suggest tactical buying as price fell to a five-year low. The 6.3% price decline last week brought cocoa price to a five-year low at US$2338/ton. This price drop reflects a correction after a larger-than-expected production while the threat of the Harmattan (a dry and dusty wind) – initially expected to disrupt 50% of global production – did not materialise. We believe the current multi-year low in cocoa’s price is perceived as a buying signal by contrarian investors.

European corporate bonds ETFs saw US$4.3m outflows. We believe the ECB’s decision to reduce the amount of monthly bonds purchase by EUR20bn after April coupled with the highly uncertain outcomes from the upcoming presidential elections have weighed on investor interest in European corporate bonds. The French far-right Presidential candidate, Le Pen, who is currently in second place according to recent polls, has promised the return of the French franc, threatening a redenomination of EUR1.7bn of French debt into francs if she were elected with the potential to default.

Video Presentation

Morgane Delledonne, Fixed Income Strategist at ETF Securities provides an analysis of last week’s performance, flow and trading activity in commodity exchange traded products and a look at the week ahead.

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Greece Teetering on the Brink of Default

Greece Teetering on the Brink of Default

ETFS Multi-Asset Weekly – Greece Teetering on the Brink of Default

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Highlights

•    Weather driving sharp movements in agricultural commodities.
•    Equity markets to price in default?
•    Haven demand and economic recovery fuelling US dollar higher.

A sharp re-pricing of risk is likely to follow Greece’s decision to hold the question of accepting its creditor terms to a referendum. Capital controls have been implemented to stem outflows from Greece’s banks while the ECB has frozen the Emergency Liquidity Assistance to Friday’s levels. Greece still owes the IMF €1.6bn tomorrow. Failure to pay could descend the country into chaos, marking the first sovereign default in the euro area since its creation. We believe that demand for defensive assets such as gold and the US dollar are likely to be key beneficiaries of the unfolding crisis.

Commodities

Weather driving sharp movements in agricultural commodities. Rain in the US delayed the harvesting of wheat and potential the sowing of soy, acting as a catalyst for price gains of 9.0% and 2.3% respectively. Meanwhile strong winds in Iowa and Illinois knocked over young corn stalks driving the price of corn up 5.2%. An acreage report from the USDA out tomorrow is likely to revise the estimates for planting of soy from what was expected to be a record high when the prospective planting survey was conducted in March. An intensifying El Niño weather pattern will likely see further disruption to crops this year. We believe that drier conditions in Australia, India and West Africa will drive wheat, sugar and cocoa prices higher. Better soy growing conditions in the US and South America that will result from an intensified El Niño will mitigate any lower planting intentions for soy, acting as a negative weight on price.

Equities

Equity markets to price in default? The continuing Greek debt saga led to choppy trading in Europe last week, with most bourses ending the week higher on optimism that some sort of deal would have been brokered over the weekend to avoid Greek defaulting on its IMF loan tomorrow. The referendum and capital controls now throw doubt as to whether a solution can be quickly found. European equity markets are faltering as a repricing of risk takes place. Meanwhile, the MSCI China A-Shares index has declined by closed to 20% in the past two weeks. While the Chinese domestic equity market has rallied more than 100% in the past year (even after the correction), the authorities are keen to the see that sentiment does not unravel. Over the weekend the People’s Bank of China cut interest rates by 25bps and lowered the reserve requirement ratio for small banks by 50bps.

Currencies

Haven demand and economic recovery fuelling US dollar higher. Greek financial woes drove the US dollar 2% higher against the Euro. The ongoing saga is likely to continue to favor the US dollar, as near-term solutions are likely to be met with more arduous negotiations. With the threat of an accident always around the corner, it is clear why haven currencies are sought after. While the Swiss franc has traditionally been treated as a haven currency, the Swiss National Bank has tried to lean against the wind with verbal intervention. After the SNB’s head declared its currency significantly overvalued, the currency declined 2.2% in the week against the US dollar. US non-farm payrolls due on Thursday and manufacturing ISM on Wednesday are two indicators that will be market will be looking at closely to assess whether the Fed is still on track to raise rates in September. Once the US starts to raise rates, we believe that increases will be gradual and highly data dependent. That could slow the pace of the current US dollar rally.

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