Investors continue to sell long positions in crude oil ETPs with outflows of US$36mn last week. With the exception of one week, we have now seen 29 consecutive weeks of outflows. That is similar to the period of outflows seen in 2013/14, just prior to the fall in oil prices in late 2014. To further highlight investor scepticism in the sustainability of current oil prices, we have seen inflows of US$53mn in short positions over the same 29 week period. The oil market currently has two key opposing forces influencing prices: further signals that OPEC and Russia will persevere past 2018 with regards to production freezes, and the most recent IEA report highlighting that they expect US oil production to surpass that of Saudi Arabia. We continue to believe the oil price is likely fall back into the range between US$45 to US$60 per barrel in the coming year.
Precious metals saw broad outflows of US$55mn, with the majority of outflows from silver ETPs, which saw outflows of US$49mn last week, bringing year to date outflows to US$77mn. The current gold:silver ratio is currently at 78, above 1x standard deviation from its average, highlighting silver is historically cheap at current levels after the recent gold price rally.
In currencies, investors sold out of long ETPs in both the USD and EUR to the sum of US$61mn, the largest flows since June 2017. We believe this was due to increasing rhetoric of further tightening from the ECB and worries from investors over rising government bond yields in the US. USD and EUR ETPs saw outflows of US$27mn and US$5mn respectively, further highlighting investor bearishness over the currencies.
Robotics ETPs posted another strong week of inflows – totalling US$53mn – just shy of the record US$56mn the previous week. This brings total inflows this year to US$128mn. Expectations are high for the upcoming earnings season. Consequently Robotics ETPs have outperformed the S&P500 by 5% this year. Valuations remain at 31x, at their long-term average, to the MSCI Global Technology index.
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This communication may contain independent market commentary prepared by ETFS UK based on publicly available information
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ETF Securities FX Research: Central bank policy key for FX direction in H2
Summary
USD dollar in a bottoming process as the US Federal Reserve becomes more proactive with monetary policy.
Euro primed for decline as investor positioning is extremely overcrowded despite measured European Central Bank (ECB) rhetoric. Upside potential for GBP despite the mixed message from the Bank of England (BOE) keeping volatility elevated.
New directional driver for FX
Currency volatility has made a persistent move downward in recent weeks, back towards longer-term averages and in line with the trends in other asset classes. We believe that the fade in European political uncertainty has been a key factor in the reduction in FX volatility.
We expect that the changing policy stance amongst major central banks will once again be the main driver of FX direction in H2 2017, as the investor focus on political risks diminishes. In turn, as inflation becomes evident, real interest rate differentials will become an increasingly important indicator for FX markets.
USD in a bottoming process
The more hawkish stance from the Fed in recent weeks is key to the beginning of an H2 USD rally. The Fed’s commentary post its June rate hike appears to be more proactive, suggesting a tighter policy stance by year-end. Historically the Fed has been very reactive with its interest rate settings. However, it is a welcome development that the Fed is taking its mandate of price stability more seriously, with the jobs market near full employment and alongside a continued improvement in growth. Such a change in stance shows its commitment to mitigating the adverse effects of unanchored inflation expectations on growth. As a result of the Fed becoming a more credible inflation fighter, the USD will be buoyed against other G10 currencies, particularly the EUR and JPY – two of the largest weights in USD indices.
We expect that, although gradual, the Fed’s rate hikes in 2017 and early 2018 will buttress the USD as real rate differentials rise. In turn, the USD should reverse its recent course and trade towards the top of its six-month range by year-end – a potential gain of around 3%.
Euro looks extremely stretched
We feel that the Euro strength is at risk of a rapid unwind as the ECB continues to be conservative in its policy prescriptions. Compared to historical long-term averages, positioning for the Euro, particularly against GBP is extremely stretched. Investor optimism is at odds with market pricing in the options market, which is neutral and in line with historical averages. Investors appear to be pricing in action that may not occur in the near-term from the ECB, namely a strident discussion on tapering the size of the balance sheet.
Central bank policy has historically been conservative – the ECB has been very careful not to spook the market. Draghi’s very balanced comments suggest stimulus will remain in place for some time yet, and could disappoint market expectations for tapering in the near-term. Draghi noted that ‘our policy needs to be persistent, and we need to be prudent in how we adjust its parameters to improving economic conditions’. These comments were misinterpreted, boosting the Euro, despite only a 75% chance of a rate hike priced in by September 2018.
Is Carney losing control?
Similarly, there is a 75% chance of a rate hike for August 2018 for the UK. The sharp swing in the Monetary Policy Committee voting from 7-1 to 5-3 (at its June meeting) in favour of not raising rates has supported GBP. It also suggests the Governor is losing control of the Committee members. However, it is difficult to have a strong consensus when the policy message is so inconsistent. To begin, the BOE’s Chief Economist Andrew Haldane (who voted to keep rates on hold) noted that ‘the dangers of moving too late outweighed those of moving too soon’, the first signal of a change in the MPC mind-set. Deputy Governor Cunliffe followed up with the suggestion that ‘domestic inflation pressures…gives us a bit of time…’, indicating a relatively neutral policy outlook, in line with the Governor’s supposed view. However, Governor Carney then surprised the market stating ‘some removal of monetary stimulus is likely to become necessary’.
The mixed messages from the BOE are confusing investors and keeping GBP volatility elevated. We expect the Bank of England to unwind its Brexit-induced rate cut of 2016 in the second half of 2017, but not to remove its balance sheet stimulus from the economy. GBP will benefit from tighter policy settings.
No light at end of the JPY tunnel
With the risks to the global economic recovery falling, we expect that the JPY should remain a funding currency as we expect the Bank of Japan’s (BOJ) Quantitative and Qualitative Easing program to be expansive throughout 2017. Accordingly, we feel that the ongoing stimulus from the BOJ will keep yields low and force domestic money offshore to search for yield. Such investment outflows will lead to a persistent decline in JPY. The only thing that could give upward impetus to the Yen would be a sharp ‘repricing of risk premia’ (in the words of the European Systemic Risk Board), in turn prompting a risk asset correction.
The bottom line…
As currency volatility continues to moderate, GBP will again test the 1.30 level and potentially break to the upside, targeting 1.35. We expect that the Euro – the best performing G10 currency in H1 2017 – will be one of the laggards in H2. The USD will grind higher but the Yen will remain at the foot of the G10 currency pile.
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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
Volatility turnaround to drive asset class returns
ETF Securities FX Research – Volatility turnaround to drive asset class returns
NOK and GBP to outperform
Summary
Investor uncertainty remains elevated. However, investors differ with consumers, with consumer sentiment on an uptrend, lifted by jobs and low energy prices.
Currency volatility expected to moderate as investors convinced by underlying strength, helping support a ‘risk–on’ environment.
The British Pound has historically had a strong inverse correlation with volatility.
Currencies battered by volatility to turnaround, with Norwegian Krone and British Pound leading the way higher.
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
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ETF Securities Equity Research – Gold miners caught in a value trap
Summary
Gold miners are historically very cheap but at this juncture are likely to be a value trap due to profitability concerns.
Gold miners are facing deteriorating ore grades despite the CAPEX splurges from 2007 to 2013 and recent mine closures haven’t improved margins.
The recent slide in energy prices and the depreciation of currencies in jurisdictions where local miners operate, has had minimal positive impact on cash costs.
We prefer gold relative to gold miners until the fundamentals improve.
We find ourselves starting 2016 with heightened market volatility. A global sell off in financial markets has pushed up gold prices by 2%, while gold miners have fallen by 7%. This has piqued our interest in the rationality of the historical parity between gold and its miners. While the case for gold remains intact we scrutinize the current valuation of gold miners. For the purpose of this report, gold miners refer to the constituents of the DAXglobal Gold Miners USD (TR) Index.
At first glance, offering a 59% discount to the gold price since 2009, gold miners seem attractive. Coupled with a price to book value of 1.0x and an average dividend yield of 2.8% make them a compelling investment from a valuation perspective. But when comparing with the mining sector in general, which trades at a price to book of 0.69 and an average dividend yield of 5.5%, gold miners do not offer the best value in the sector.
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Furthermore, the decline in median cash dividend cover to 1.4x suggests sustainability of dividend payments remains questionable.
Elevated production costs dent margins
The recent slide in energy prices, (which has historically been positive for miners), and depreciation of currencies in jurisdictions where the local miners operate, has had minimal beneficial impact on cash costs. Cash costs continue to rise and consequently narrow profit margins. Given the decline in exploration of new projects and construction of new mines we have used ”cash costs” as our metric for calculating the mining cost of production as opposed to ”all in sustaining costs” which includes the full costs of producing gold including exploration and bringing new mines online.
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Declining ore grades raise production costs
A significant factor contributing to the rising cash costs is the decline in average ore grades of existing mines that have witnessed a staggering 51% decline since 2000. Either the gold is too dispersed (low grade) or buried too deep underground (high grade) making the task of gold mining quite expensive given its capital intensive nature. The average ore grades of producing mines stand at 1.18g/ton, while that of undeveloped deposits is 0.89g/ton according to Visual Capitalist. These undeveloped mines represent a staggering 66% of all deposits on earth, leaving gold miners faced with deteriorating efficiency and higher costs as current reserves are depleted.
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Discovery drought weighs on profitability
In addition, the future profitability of miners has come into question as they face the brunt of aggressive reductions in capital expenditure in the form of closures of uneconomical mines and curtailed exploration budgets. The golden era that lasted from 2001 to 2011 rewarded gold miners for aggressive growth over cash flow generation, eroding company valuations over the long run as they were funded by record amount of debt.
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Today, long term risks to supply remain at the forefront of the debate after capital expenditures have declined to the lowest level in 12 years.
Gold miners are much higher risk
The financial credibility of the gold miners is low. The credit default swap spreads (CDS) for gold mining companies have risen 712% on average since 2003 to 220 basis points, well above the 66bp average for the S&P500. While it is unlikely to prompt a wave of impending defaults, as the net debt to EBITDA is low at 0.5, it reflects the increased risk of owning gold miners particularly when compared to the relative safe haven of physical gold. Furthermore, it highlights gold miners’ ability to raise debt while debt costs are typically rising, is becoming more difficult.
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We continue to prefer gold over gold miners
We believe that gold prices will be constrained by rising nominal interest rates and some strengthening of the US Dollar in the short-term. However, we believe the US Federal Reserve (Fed) is potentially behind the curve with risks of inflation rising by more than their expectations and the markets in the longer-term. Furthermore, we believe the US Dollar strength is likely to wane, taking some of the gold-negative pressure away.
Contrary to popular belief, historically gold tends to rise in the first year of rate hikes, having only faltered when real interest rates rose aggressively in 1994. We believe a repeat of 1994 is unlikely in light of dovish leadership at the Fed.
Despite the low valuation of gold miners, on a risk adjusted basis we prefer physical gold and other areas of the mining sector which offer much better value.
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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• Commodities: Oil market to rebalance in 2020 at US$80/bbl. according to IEA.
• Equities: Chinese stocks benefit from strong ’Singles Day’ sales.
• Currencies: USD and GBP strengthen as employment market improves.
• Upcoming webinar: Global commodities, have we reached the floor in prices? Register here to attend.
• Oversupplied markets and weak industrial production in China continue to weigh on commodity prices
• While stocks fell across the developed market, strong ‘Singles Day’ sales lent support to China A
• The US dollar continued to find support from previous week’s payroll numbers, while the Euro came under pressure as ECB hinted at expansion of QE next month
Commodities
Oil market to rebalance in 2020 at US$80/bbl. according to IEA. In the World Energy Outlook 2015 published on Tuesday, the International Energy Agency (IEA) expects oil market to remain subdued for the next five years. While IEA forecasts annual demand growth at 900,000 barrels per day until 2020, further production and spending cut are needed to reduce the surplus on the oil market. US oil inventories reported last week are now close to its all-time high while Saudi Arabia is offering oil at a substantial discount to Brent to the European market, sending oil prices near their respective historical lows. A considerable sell-off in the global ETF space continues to weigh on platinum and palladium prices. Meanwhile, sugar and cocoa both rose 1.4% on the upward revision of the 2015/2016 deficit by the International Sugar Organization and on the acquisition of Nyonkopa, the Ghanaian cocoa purchaser, by the Swiss based Callebaut chocolate maker announced last Monday.
Equities
Chinese stocks benefit from strong ‘Singles Day’ sales. Developed market stocks fell over the past week. Buoyant jobs data in the US released the previous Friday failed to support the S&P 500, which dropped 2.5%, as US retail sales disappointed. China import, industrial production and loan growth data came below expectations and previous months’ numbers. However, MSCI China A index gained 3.1% last week responding to the better-than-expected October Chinese retail sales data and the strong ‘Singles Day’ sales last Wednesday, highlighting the transition in China’s engine of growth toward services. While industrial production in Europe has been growing by 1.7% yoy in September, German industrial production fell for the third consecutive month and UK’s economic recovery remained unbalanced pushing the DAX 30 and FTSE 100 down 1% and 2.8% respectively. The soft data is placing pressure on the European Central Bank for imminent policy easing.
Currencies
USD and GBP strengthen as employment market improves. Following strong US job indicators the previous Friday, the US dollar (USD) continues to strengthen although the odds for a rate hike in December reduced from 68% to 64% over the past week. In contrast to the US, strong employment data in Australia failed to support the Australian dollar which barely moved over the same period. While the British pound plunged on the day following the Bank of England decision to keep rate unchanged, the currency bounced back on a better-than-expected unemployment rate, ending last week up 1.2%. In the meantime, the European Central Bank (ECB) hinted that the asset purchase programme could ramp up to €1.1bn as soon as next month weighing further on the Euro while the Japanese Yen fell 0.7% despite expectations that the bank of Japan may put an end to its easing program in the near term.
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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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.
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