Etikett: commodity

Trump’s victory boosted commodity and stock prices

ETF Securities Trump’s victory boosted commodity and stock pricesTrump’s victory boosted commodity and stock prices

ETF Securities Weekly Flows Analysis – Trump’s victory boosted commodity and stock prices
  • Energy ETPs saw US$109mn inflows as investors anticipate higher demand in the US.
  • Gold ETPs received only US$23mn amid mixed sentiment following Trump’s election victory.
  • Investors cut their exposure to broad commodities to rotate into cyclical trades
Inflows into long oil ETPs rose to a 14-week high, led by US$89mn into crude oil. Investors are seeing buying opportunities after energy prices dropped to a multi-month low on the back of the election of Trump, who seems inclined to lift the quotas on the use of fossil fuels. Gold ETPs received inflows of only US$23mn last week. The rise of long-dated US Treasuries yields coupled with a stronger dollar weighed on the price of gold last week. Gold fell below US$1250 per troy ounce, losing 5.1% on the week, suggesting risk-on sentiment returned to markets. Investors withdrew US$25mn from EM local currency bonds ETPs as EM faced a technical sell-off in reaction to the rise of the US dollar. The sell-off in emerging market (EM) assets and currencies due to the appreciation of the US dollar and Trump’s threats to restrict imports appears overdone. If Trump’s threats to withdraw from the trade agreements, including the NAFTA, turn into actual restrictions, the US would face intense legal battles in the WTO. In our opinion, any abuse of power could prompt the Congress to narrow the delegations of power on foreign commerce. We maintain our long-term positive view on EM bonds in light of improving EM fundamentals and supportive valuations. Investors reduced their exposure to broad commodity ETPs. Last week investors withdrew US$81mn from broad commodity ETPs, the largest outflow since October 2011. Risk-on market sentiment following Trump’s election as US President has reduced the attractiveness of broad commodities’ exposures as a portfolio diversifier. We believe investors are generally favouring more pro-cyclical strategies. Profit-taking prompts outflows of US$22mn from industrial metals ETPs. Industrial metals prices are being boosted by strong equity market performances and the prospect of higher demand from Trump’s announced infrastructure investments. We believe investors generally took profits as prices reached multi-month highs, with the exception of copper. Indeed, investors continue to pour money into copper – which saw its largest inflows since July – while copper prices gained 10.8% last week. What to watch this week. Investors will mainly focus on Eurozone GDP figures for the third quarter and inflation. Any acceleration in growth and inflation trends could pose risks to the anticipated expansion of the ECB’s quantitative programmes beyond March 2017 and cause the long-dated sovereign yields to sharply reprice higher.

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.

For more information contact

ETF Securities Research team ETF Securities (UK) Limited T +44 (0) 207 448 4336 E info@etfsecurities.com

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Commodity rebound not enough for Aussie dollar

Commodity rebound not enough for Aussie dollar

ETF Securities FX Research: Commodity rebound not enough for Aussie dollar Aussie dollar has tracked global commodity prices higher in 2016, but soft domestic conditions will pressure the local currency. Corporate earnings have remained lacklustre, just 5% above the multi-year lows China’s growth remains robust, but the softening trend is a bearish factor for AUD. The commodity price rebound won’t be enough to offset AUD declines. Futures market pricing remains buoyant, but appears to be rolling over. The options market indicates that AUD has the lowest level of optimism of G10 currencies for growth in coming months.

Commodity price rebound

The Australian Dollar (AUD) is one of the major global commodity currencies, as its economy is closely tied to its export base. Commodity markets have begun to recover in 2016, and the AUD has rallied by over 4% in 2016 – the fourth best performing G10 currency in 2016 after the JPY, and the ‘other’ commodity currencies (NOK & CAD). Australia’s major commodity exports are iron ore and coal. Both commodities have recorded stellar gains in 2016, rising 23% and 78%, respectively, and the strong links of the Australian economy to commodity exports have buoyed the local currency. These bulk commodities take a 54% weighting in the Reserve Bank of Australia (RBA) Commodity Index. (Click to enlarge) Nonetheless, the Aussie dollar has been weighed down by the sharp decline in company profits in recent years. As a result, capital expenditure plans have been put on hold, particularly in the resources sector. However, the non-mining economy is broadly picking up the slack, with construction, and public spending propping up the economy in 2016. And profits have begun to edge higher this year, helping the AUD to track toward the top of its range in recent months. (Click to enlarge)

Chinese growth robust but softening

Another area of growth for the Australian economy this year has been exports. There is a strong correlation between the terms of trade (the amount that Australia receives for its exports relative to what it pays for imports) and the Aussie Dollar. As Australia’s largest trading partner, the Chinese economy remains a significant determinant of the performance of the Australian currency. The growth path of China will determine future demands of Australia’s output, in turn impacting the strength of the Australian dollar – the greater the demand, the greater the buoyancy for commodity prices. The driver of China’s economy is moving toward a more domestic demand driven, services sector led growth. Accordingly, we feel that growth indicators, like the Li Keqiang index are somewhat outdated and should include new measures that represent a growing services sector, like retail spending and internet usage. (Click to enlarge) Our modified Li Keqiang Index shows growth should continue to be elevated, although the trend is lower. The softening growth path is likely to lead to a weaker AUD. While commodity prices will be continually supported by Chinese demand, we expect that it will not be enough to buttress the Aussie dollar at current levels.

Central bank policy

Interest rates also play a key role for currency movements in the shorter term. Accordingly, both Australian and US central bank policy can substantially affect the value of the AUD. Although the Reserve Bank of Australia (RBA) has continued to cut interest rates (dropping the official rate to 1.5% in August – the lowest level on record) the Aussie Dollar has been resilient. The market expected the central bank should have done more to support the domestic economy in order to fulfil its price stability mandate, and as a result AUD continued to rally. We feel the rally is beginning to lose momentum. Despite cutting rates twice during 2016, in an easing cycle that has spanned the past five years, we expect that the RBA will keep rates on hold for a protracted period, although inflation remains low. Price pressure is likely to remain lacklustre for a prolonged period because of the absence of wage growth. In contrast, the US Fed is likely to continue its tightening cycle. The combination of a neutral bias for policy in Australia, matched with the upward path for rates in the US, we expect that the Australian dollar is unlikely to break to the upside of its recent A$0.72-0.78 range against the US Dollar. With the US Federal Reserve already beginning to tighten policy, albeit extremely gradually, and with the likelihood of lifting rates again in 2016, widening rate differentials should provide US Dollar support. Accordingly, we expect the Australian dollar to grind lower toward the bottom end of the range in the coming months. (Click to enlarge) Another way to trade a softer AUD is via the British Pound (GBP). GBP/AUD is hovering at the lowest level in three years after the ‘flash crash’ in GBP last week. We expect that GBP has overshot fundamental drivers to the downside and with risks balanced for a downside move for AUD, we feel that GBP/AUD could see a significant rebound toward A$1.65 from A$1.60 in the near term.

Market pricing

(Click to enlarge) Futures market net long positioning has rebounded in recent weeks, towards the 2016 highs. With the AUD trading around the top of the 2016 range, options market pricing shows that the AUD has the lowest level of optimism of G10 currencies for growth.

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This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”). The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value. This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States. This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

Rate rise fears temper firm commodity fundamentals

Rate rise fears temper firm commodity fundamentals

ETF Securities Commodity Monthly Monitor – Rate rise fears temper firm commodity fundamentals

Your reference guide to commodity markets. Includes the latest outlook for each commodity sector and major developments for individual commodities.

  • Despite the lower probability of a La Nina weather pattern developing this year, the overhang of record stock levels and higher production forecasts are weighing on prices.
  • Fundamentals to sustain a recovery in industrial metals in Q4 or Q1 2017.
  • Oil continues to remain volatile, but will trade within a range of US$40/bbl to US$55/bbl.
  • Precious Metals likely to remain volatile amid key central bank meetings.

The base effects from the commodity rout in late 2015 only begins rolling out of the headline inflation data in late 2016 but should leave US inflation close to 1.7% by year end, up from 0.8% now. This coupled with rising wages is likely to pressure the US Federal Reserve to raise interest rates in December, with a rhetoric prior to that of increasing hawkishness. Following a strong run in commodities (since the February trough) of 22%, weaker growth expectations from China and forecasts for policy tightening in the US have driven a selloff, with commodities declining 6% since late June. We have continued to see inflows into safe-haven assets, particularly gold, reflecting a wide range of concerns that can be categorised into five main categories:

  1. uncertainty from the Fed and
  2. the ECB over policy action,
  3. Middle-East instability,
  4. negative interest rates surpassing that of gold’s cost of carry and
  5. the broad rise of political populism in the developed world.

We believe that the rise of populist parties, elected or not, is a powerful catalyst for reform, with incumbent parties scrambling to counter the populist wave by implementing similar policies. We expect economic stimulus to shift solely from monetary policy to include fiscal policy with the end result being a rise in infrastructure spend and social initiatives to combat inequality, prompting wider government deficits and higher inflation. Despite the broad set of fears pervading the market at present we are continuing to see improving growth figures from the developing markets where delivered economic data is broadly beating expectations. We believe the emerging markets are much better positioned to weather the prospects of a stronger USD now than they were 3 years ago.

  • Despite the lower probability of a La Nina weather pattern developing this year, the overhang of record stock levels and higher production forecasts are weighing on agricultural commodity prices. Coffee, sugar, corn and soybean oil were the only commodities to post positive returns among the agriculture commodity complex.
  • Fundamentals to sustain a recovery in industrial metals in Q4 or Q1 2017. Declining production combined with rising consumption resulted in a global supply deficit in each industrial metal in Q2. The commodity sector may end 2016 in a deficit for the second time since 2005. We believe copper is the best positioned to benefit from the recovery.
  • Oil continues to remain volatile, but will trade within a range of US$40/bbl to US$55/bbl. Speculation as to whether OPEC will freeze production after its informal meeting later this month has been a source of that volatility. However, we believe that focus on an OPEC freeze is misplaced and cuts to non-OPEC production will push the market into balance.
  • Precious metals declined 2.1% last month as expectations of a US rate hike this year increased and the ECB failed to signal any further loosening of policy. We believe demand for gold and silver is likely remain volatile in the second half of the year amid a number of decisive central bank meetings and the US presidential election.

For those of you following the contrarian model we have the following signals;

BUY                       Ticker Copper                 COPA LN PCOP LN (GBP hedged) 00XL GY  (EUR hedged) LCOP LN  (2x Leverage) 3CUL LN  (3x Leverage)

Live Cattle           AIGL LN FLIV LN  (Longer dated) LLCT LN (2x Leverage)

SELL                       Ticker Gasoline              UGAS LGAS  (2x Leverage)

For more information contact

ETF Securities Research team ETF Securities (UK) Limited T +44 (0) 207 448 4336 E info@etfsecurities.com

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Time to short sugar, coffee and soybeans

Time to short sugar, coffee and soybeans

ETF Securities Commodity Research – Time to short sugar, coffee and soybeans

Summery

  • Sugar, coffee and soybeans have made spectacular returns this year, but much of their gains have been driven by currency movements, particularly the Brazilian Real.
  • With record production of Arabica coffee and soybeans expected in 2016/17 and a narrowing deficit in sugar, the rally is likely to come under pressure.
  • If the Brazilian Real remains stable, we expect fundamentals to prevail and the price of these sugar, coffee and soybeans to decline.

Brazilian Real drives rally

The El Niño weather pattern led to a failed monsoon in India and unseasonably wet weather in South America in 2015/16. However at the time of onset of the adverse weather, the price of sugar, coffee and soy made only muted moves. The sharp depreciation of the Brazilian Real weighed on their performance as stocks of these commodities could be sold in US Dollars, providing millers and farmers with improved margins. When the Brazilian Real started to appreciate we saw the price of the commodities make substantial returns. Year-to-date, sugar, coffee and soybeans have returned 35%, 19% and 25% respectively.
(Click to enlarge)

Weather patterns changing

The El Niño of 2015 was one of the most extreme on record by some measures, but the impacts of the weather phenomenon should be largely behind us now. The National Oceanic and Atmospheric Administration forecasts that the opposite weather phenomenon, La Niña, will emerge by the Northern Hemisphere autumn with a probability of 75%. La Niña involves a cooling of the Pacific Ocean (in a similar manner to El Niño warming the ocean), which changes trade winds and weather patterns from what is considered to be normal. Broadly speaking, areas that were excessively warm and dry in El Niño are likely to turn cool and wet in a La Niña. We assessed the likely impacts of La Niña emerging in autumn/winter (see Opportunity to short agriculture with La Niña) which highlights that the weather phenomenon is likely to be price negative for many crops with the exception of sugar. Cooler Southern Hemisphere temperatures are likely to reduce the heat damage that we have seen in the past crop. Sugar maybe an exception as cooler, wetter weather could reduce the sucrose content of cane in Brazil.
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Record coffee production

After two consecutive years of production decline, coffee output is expected to rebound to an all-time high. Brazil, which produces approximately 45% of global Arabica supplies has seen favourable rain during the flowering of its coffee bushes, setting the scene for a healthy crop. Although the beginning of the harvest has been slowed by rain, current dry and warm weather should allow for field work to catch up. Brazilian output is expected to rise by close to 20% in the current 2016/17 crop. Elsewhere, production in Honduras (7% of global production) is expected to make a recovery after the planting of ‘rust- resistant’ trees several years ago, which is helping to improve yields. The country has engaged in a renovation programme to protect its coffee from the rust-leaf fungus which has reduced production from Central America and Mexico for the past four years. Honduran production is likely to hit an all-time high of 6.1 mn bags (a 7% gain).
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Narrowing sugar deficit

After 5 consecutive years of sugar surplus, 2015/16 was the first year of a deficit. The failed monsoon in India and Thailand has seen production in these two countries decline the most (the combined output of both countries is about 25% of global production). Production in Brazil (20% of global production) also declined, not because of a decline in cane growth, but because more cane was used for ethanol production. The 2016/17 cane harvest in Brazil, which is about a quarter complete, is progressing 15% faster than last year’s harvest. With relatively low gasoline prices we don’t expect a large diversion to ethanol this year. Sugar production in Brazil is running 25% ahead of where it was last year and we expect a 7% increase in Brazilian sugar output in 2016/17.
(click to enlarge) The Indian monsoon is currently approaching its northern limits and rainfall has been at the long-term average. In contrast to last year, resevoirs will likely be amply replenished. Indian sugar output is likely to rise as a result of more favourable conditions for its cane crop. Sugar consumption is expected to rise by 1% globally, leaving the market in a production deficit despite the increase in supply. However, that supply deficit will narrow. While sugar stocks will continue to decline, they will remain above the long-term average of 31 million tonnes.

Soybeans head for record production

The Argentine soybean harvest in 2015/16, which is virtually complete, is expected to produce 8% less soybeans that the previous year as flooding in April and May spoiled the crop. Argentina provides approximately 20% of global production. Brazil (30% of global production) has seen its harvest remain close to the previous year’s levels. The 2016/17 year crop for Argentina and Brazil has not yet been planted. The US 2015/16 crop was a record high. Although USDA projects a decline for 2016/17, we believe that their forecast remains overly conservative. By July 3rd 2016, 22% of the crop was blooming (8% ahead of last year) and 72% of crop was in good or excellent condition (10% better of last year). Moreover, planted acreage of soybean in the US has increased by 1%.
(click to enlarge) Speculative positioning in soybean futures stand more than 1.5 standard deviations above the 5-year average, highlighting that investor optimism remains elevated. We believe that the investor optimism is a response to the disappointing Argentine crop of 2015/16. While the 2016/17 Southern Hemisphere crop is not yet in the ground, our analysis of La Niñas indicate that weather conditions could be quite favourable for the crop this year.

Downside risk to Real

While difficult to predict the path of a currency that has been so volatile in the past few years, we believe that the good news about relative political stability (after the impeachment of the President Dilma Rousseff) has been largely priced in. Economic conditions remain challenging for the country and therefore limit significant further appreciation. We believe that currency appreciation will no longer be a meaningful catalyst for price increases in sugar, soybean and coffee for the remainder of this year and the crops will trade on their own fundamentals. Rising production should therefore be price-negative.

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Commodity volatility expected

Commodity volatility expected

ETF Securities Commodities Research: Commodity volatility expected as China liberalises financial markets

Commodity volatility expected as China liberalises financial markets

Summary

China is both one of the largest producers and consumers of most commodities. Yet financial centres in the UK and US are responsible for setting global prices for many commodities.

China seeks to expand its role in the intermediation and price setting of global commodities. However a key hurdle is currency restrictions and capitals controls.

While timing of any currency and capital market reform is unclear, dismantling these restrictions could unwind large carry-trades that use commodities as collateral, introducing a new source of volatility to the asset class.

China and commodity demand

China’s role in the upward phase of the commodity supercycle remains largely undisputed: resource-intensive economic growth, led by urbanisation, industrialisation, and a growth in global trade between the mid-1990s and the financial crisis in 2008 drove demand for commodities higher. With supply unable to keep up with demand, prices rose substantially higher. Although more volatile, commodities prices have a fairly strong correlation to China’s GDP growth.

China’s commodity futures markets

Futures markets are an integral part of the global financial market infrastructure, as they allow both consumers and producers of commodities to hedge. Hedgers are typically on the short side of futures markets and thus need to offer positive risk premia to attract speculators on the long side.i By bringing a large number of financial investors to the long side, financialisation of commodities mitigates this hedging pressure and improves risk sharing.

Although China is the largest consumer of commodities, its development of a futures market in commodities only took place after the onset of the commodity supercycle (and many commodities have been added in the downward phase of the cycle). The Shanghai Futures Exchange (SHFE) started trading copper and aluminium in 1999 and added zinc (2007), gold (2008), nickel (2014).
The volume of gold and copper traded on the SHFE has been rising, highlighting the traction that the market for these metals has been gaining in China.

Global ambitions require currency policy change

China seeks to play a larger role in the intermediation of commodities internationally. It recognises it is the largest consumer and producer of many commodities, yet relies on financial centres outside of China for the setting of prices. Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said at the SHFE’s annual conference in May 2016 “We’re facing a chance of a lifetime to become a global pricing center for commodities”. Due to currency restrictions, trading in raw materials is largely off-limits to overseas investors. However, that is an issue that China has long pledged to change. Any change in currency policy will likely be a strong catalyst for the growth of China’s commodity futures market.

Distortions in Chinese commodities…

Closed capital markets and currency restrictions have led to some unusual practices in China. China’s interest rate is higher than many other countries (especially developed market interest rates which in some cases are below zero). If Chinese investors were able to borrow in foreign currencies they could engage in a typical carry trade and arbitrage from the rate differential (subject to currency market moves). However, capital restrictions which stop domestic investors accessing foreign loans and exchange rate management violate the so called ‘covered interest rate parity’.

However a loophole exists. In order to make Chinese manufacturers more profitable, the authorities allow them to use work in process inventory such as copper, tin, aluminium (or even finished inventory) as collateral for loans. A manufacturer can go to a local bank and ask to borrow in US dollars or euros or yen etc. at low interest rates using commodity as collateral. The funds will be delivered to the manufacturer in Yuan and can be deposited at high interest rates. The local bank would verify to the People’s Bank of China (PBoC, the central bank) that the collateral is sitting in a warehouse (i.e. is bonded) and the PBoC will use an offshore entity to borrow the funds (which it will then pass to the local bank).The existence of the facility could be artificially inflating demand for commodity imports into China.

The risk with opening up currency markets therefore is that this carry trade could fall away and unlock a substantial amount of commodities tied up in bonded warehouses to industrial usage.

It is estimated that in 2014 about US$109 billion foreign exchange loans in China were backed by commodities as collateral, equivalent to 31% of China’s short-term FX loans and 14% of China’s total FX loans.ii In 2014, China imported US$1.7 trillion of commodities. The estimated amount of financing therefore represents about 6% of imports. In the worst case scenario if all those commodities were to unwind (a scenario we don’t believe will occur), there could be a 6% supply shock, which would be price negative. A collateral unwind of a smaller magnitude, we believe will still lead to commodity price volatility.

Copper is probably most at risk. Close to half of current copper demand in China could be from the copper carry trade.

…including gold

A similar trade exists in gold. Imported gold is being used via gold loans and letters of credit to raise low cost funds for business investment and speculation. Financial liberalisation could also see these trades unwind.
In 1950 China had prohibited private ownership of bullion and put the gold industry under state control. With the creation of the Shanghai Gold Exchange (SGE) in 2002, formal prohibition on gold bullion was lifted in 2004. China has embraced this relatively new opportunity to own gold, with the country overtaking India as the largest consumer gold coins and bars. Despite the cultural affinity to buy and store gold, those stocks can be monetised. Gold leasing i.e. the ability for banks to loan out gold has seen rapid growth. Gold can also be used as collateral for borrowing from banks as long as it meets the SGE criteria. Once again this collateral-based lending could fall away if access to unsecured loans is improved.

We expect any movement to a freer currency and open capital markets to be gradual. But that transition could introduce volatility to global commodity prices as collateral carry trades in China unwind.

i Keynes (1923), Hicks (1939), Hirshleiffer (1988)
ii “Commodities as Collateral” in forthcoming Review of Financial Studies by Ke Tang (Tsingua University) and Haoxiang Zhu (MIT Sloan School of Management), April 2016

Important Information

General

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data.

Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.