Greece The Dangerous Game of Brinkmanship Continues
ETFS Multi-Asset Weekly – Greece The Dangerous Game of Brinkmanship Continues
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Highlights
Energy rallies while agriculture pares recent gains.
China A-shares rally on positive indications from MSCI.
Commodity currencies diverge.
Commodities
Energy rallies while agriculture pares recent gains. Natural gas gained 7.6% last week, reversing the previous two week’s losses. Higher power demand driven by air-conditioning needs tend to drive up natural gas demand in the summer period. Above average temperature forecasts for the south east of the US were the catalyst for the recent gains. There were no surprises in the weekly natural gas in storage data with a net change of 111 Bcf, close to 113 Bcf expected. Both Brent and WTI continued to defy the lack of material supply tightening news, with both benchmarks gaining close to 5%. Crude oil prices appear to be reacting to higher demand forecasts, but we believe that the higher prices themselves are likely to choke off demand. Sugar declined a further 3.5% last week, to a 6 year low, driven mainly by a depreciating Brazilian Real exchange rate. The global glut in sugar continues to weigh on sentiment. The USDA surprisingly increased wheat supply forecasts for this year. Wheat had previously been rallying following excess rain in in the key growing areas in the US.
Equities
China A-shares rally on positive indications from MSCI. MSCI declared it is a matter of “when” and not “if” they will include domestically traded A-Shares to its Emerging Market benchmark. MSCI announced that is working with the China Securities Regulatory Commission on overcoming the final roadblocks to inclusion. Furthermore they said they will not necessarily wait to their annual index review to announce inclusion. If reform maintains its current pace, we are likely to see MSCI’s concerns on capital mobility, quota allocation and beneficial ownership quickly resolved. That would pave the way for domestically traded shares to enter the emerging market index that currently has approximately US$1.5tn benchmarked against it. European bourses meanwhile traded lower as concerns about Greece’s precarious finances linger.
Currencies
Commodity currencies diverge. Citing weak commodity prices, falling import prices and subdued wage inflation, the Reserve Bank of New Zealand cut the official cash rate last week driving the NZD lower. It also expressed concern that the currency is still overvalued despite depreciating since April, and that further rate cuts are possible. The Reserve Bank of Australia also remains dovish. Meanwhile the recent bounce in oil price has supported NOK and CAD, driving the commodity currencies apart. The lack of progress in Greece’s negotiations with its creditors continued to weigh on the Euro. With the IMF pulling out of discussions, the risk of a dramatic end to the standoff between the Greek government and its creditors has now increased. As long as the Fed continues to indicate it is on track to raise rates in September, we are likely to see the US dollar remain a key haven for investors.
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