Weekly Investment Insights – Correction presents buying opportunity
In 2017, ETF Securities will be broadening its weekly FX insights to cover all asset classes including commodities, equities and fixed income. We hope you continue to find these updates useful.
Highlights
Optimism over growth prospects and accommodative monetary conditions have pushed European equity benchmarks to multi-month highs.
Current levels look unsustainable in the short run as momentum wanes and bearish technical signals surface.
Longer term prospects for European stocks appear more favourable, so any correction could be an opportunity for entry.
Near term top
European equity indices have been a beneficiary of the broad-based optimism that has characterised the market landscape since Trump’s election back in November. Most have recently set multi-month, if not multi-year, highs as analyst earnings forecasts have jumped on the back of an improved outlook for global growth based on reflationary trends. In addition, higher commodity prices, improved net interest margins and ongoing monetary stimulus have also helped to lift beleaguered resource and financial industry sectors that have previously weighed on performance. However, technical indicators suggest that across the board, the recent rally is losing steam, leaving indices such as the EURO STOXX 50, DAX 30, CAC 40 and the FTSE MIB vulnerable to a near term correction. Over the longer term, we believe that the stocks of core European states will remain attractively valued, especially when compared to their US counterparts, making any upcoming correction an excellent medium term opportunity to gain long exposure. This is especially true as economic indicators in Europe gather pace and continue to tick higher.
Momentum wanes
A “toppish” momentum divergence is where a particular index moves higher while its momentum indicators simultaneously trend lower and is typically interpreted as a bearish signal that a rally is coming to an end. This signal is in play for the EURO STOXX 50, DAX 30,CAC 40 and the FTSE MIB. All of these indices have recently reached highs which they have all failed to defend while their momentum indicators have turned lower. This implies that, at least in the near term, these benchmarks will come under pressure or at least remain subdued.
Eurozone economic uptick
Click to enlarge
Long term promise
In the medium term, we do not believe that any bearish pressure will last, as positive economic performance in Europe helps provide a boost to stock market performance. Barometers of economic strength, such as GDP growth, manufacturing surveys and industrial production, have all picked up markedly for the Eurozone since Q4 of last year (see Figure 1). The latest manufacturing purchasing managers index reading for January recently came in at the highest level in over five years, pointing towards a sustained recovery for a region that has experienced an uninspiring rebound from the financial crisis. Furthermore, indications from the latest European Central Bank meeting suggest that monetary conditions are likely to remain accommodative for the foreseeable future as core inflationary pressures remain fragile, removing the likelihood of a near term policy shock. Combined with far more favourable cyclically adjusted valuation metrics (specifically cyclically adjusted price to earnings) than the US, European benchmarks looked well placed to move higher in the coming six months.
Investors wishing to express the investment views outlined above may consider using the following ETF Securities ETPs:
Equity ETPs3x
ETFS 3x Daily Long Euro Stoxx 50 (EU3L)
ETFS 3x Daily Short Euro Stoxx 50 (UES3)
ETFS 3x Daily Long CAC 40 (FR3L)
ETFS 3x Daily Short CAC 40 (FR3S)
ETFS 3x Daily Long DAX 30 (GY3L)
ETFS 3x Daily Short DAX 30 (GY3S)
ETFS 3x Daily Long FTSE MIB (IT3L)
ETFS 3x Daily Short FTSE MIB (IT3S)
ETFS 3x Daily Long FTSE 100 (UK3L)
ETFS 3x Daily Short FTSE 100 (UK3S)
2x
ETFS DAX® Daily 2x Long GO UCITS ETF (DEL2)
ETFS DAX® Daily 2x Short GO UCITS ETF (DES2)
ETFS FTSE 100® Leveraged (Daily 2x) GO UCITS ETF (LUK2)
ETFS FTSE 100® Super Short Strategy (Daily 2x) GO UCITS ETF (SUK2)
The complete ETF Securities product list can be found here.
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Gold ETPs recorded the largest daily and weekly inflows on record, as the European equity market sell-off, led by the banking sector, triggered a 7.3% price rally for gold.
Oil ETPs recorded inflows for the ninth consecutive week, as investors remain confident that oil prices will recover in the near term.
The copper price fell again below the US$4,500/ton mark last week resulting in bargain hunting by investors, increasing exposure to long copper ETPs.
Gold ETPs recorded US$552.1mn inflows last week, the largest weekly inflows ever. While European banks recovered slightly last Friday, the market sell-off during most of last week weighed on investors’ confidence towards the stability of the European financial system. As a result, the market pressure is rising for the European Central Bank to add more stimulus at its next meeting. Meanwhile the Federal Reserve chair Yellen’s testimony last week left investors on the sideline as her tone gave no fresh clues to whether the FOMC will continue to raise rates in March. Concern over the situation overseas and its potential impact on the US economy has reduced the probability of a rate hike in the US in 2016 to under 30%. The USD consequently fell nearly 1% over the past week, lending further support to gold. The safe haven asset played its role very well, surging to US$1,241/oz. last week. As a result, US$552mn flowed into gold ETPs, of which US$345mn occurred in one day.
Oil ETPs continue to record inflows as the commodity gave back all its recent gain. Last week saw net inflows of US$50mn into long oil ETPs while short oil ETPs saw US$8.5mn of inflows. US oil inventories are reported down 755,000 barrels for the first since early January. While better-than-expected, the decline in US oil inventories failed to support prices. Last week saw the price of Brent and WTI falling 13% and 17% respectively, as both monthly reports from the International Energy Agency and the Energy Information Administration reaffirmed the state of oversupply of the global oil market. According to both, there have been little fundamental changes to justify a solid price recovery with oil prices forecast to remain low this year. While there is no evidence of discussion among the OPEC cartel at the moment, the number of countries calling for talks is increasing and a rumour on a potential meeting could suffice to trigger a price rally in the short term.
Copper prices at an attractive level for bargain hunters. With Chinese markets being closed for the entire week last week for the New Year of the monkey celebrations, recent price momentum faded. Soft investor sentiment due to European banks rout weighed on copper price, down below the US$4,500/ton mark again, reviving some interest from bargain hunters. Long copper ETPs saw US$12.3mn inflows last week while short copper ETPs saw net outflows of US$1.4mn, indicating that sentiment towards the metal may be recovering as positive momentum towards metals and mining builds.
Key events to watch this week. Mario Draghi speech later today should provide further clues on whether the central bank will step in if the situation with European banks deteriorates. Investors will also be following January consumer price index for UK and the US while studying the latest FOMC minute to be released on Wednesday
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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European equities stutter despite Greek payment deferral.
USD rebounds as Euro crisis lingers ahead of the ECB meeting.
Drawn out negotiations over Greek finances and the potential for contagion of a Eurozone exit has dulled investor sentiment, in turn weighing on European equity. Volatility remains the focus for Chinese equities as concern over inflated valuations prompted a sharp sell-off, offsetting optimism of further stimulus from policymakers. Meanwhile, US policymakers have put rate hikes back on the agenda, and the stronger US Dollar has responded. Ahead of jobs numbers this week, we expect further USD gains. At the margin the rising USD is likely to continue to weigh on commodity markets, but a key focus will be the OPEC meeting.
Commodities
OPEC in focus, but production cuts unlikely. The premature gains in oil prices that we had seen since March 2015 started to unravel last week with WTI and Brent falling 5% and 6% respectively. A firmer US dollar had weighed on all commodities. With rig counts stabilizing, it appears that US shale producers have little incentive to tighten supply at current prices. Added to that is a growing consensus that OPEC will not cut production at its June 5th meeting. Industrial metals have shrugged off concern over softening Chinese economy, and the stronger US dollar, as supply side issues are expected to lead to shortages in a variety of metal markets in 2015. Zinc and nickel in particular should remain well supported in coming months.
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Equities
European equities stutter despite Greek payment deferral. The threat of a Greek default is hanging like Damocles sword above European equity markets. The June 5th payment deferral has given Greece some breathing space, but until there is clarity over whether Greece will stay in the Eurozone, equity benchmarks will struggle to progress. Another Greek bailout remains critical, but an agreement seems some way off after IMF chief Lagarde indicated that a Grexit remains a possibility. Meanwhile, Chinese equities lost ground as investors responded to increased margin requirements and the central bank draining excess liquidity from money markets. Chinese equity markets have been trading in a volatile manner and we expect that is unlikely to disappear in the near term, until investors see a more stable underlying economic environment. Softer economic numbers are likely to keep Chinese policymakers firmly in stimulus mode and both the Reserve Requirement Ratio and official rates could be lowered in coming months, alongside announcements surrounding additional infrastructure programs.
Currencies
USD rebounds as Euro crisis lingers ahead of the ECB meeting. Recent indications from the US Fed have put the potential for rate hikes firmly on the agenda. While Q1 US growth disappointed, a host of temporary factors, like weather and port strikes had a significant impact. Going forward, this week’s US jobs data is likely to show continued improvement in the US labour market, a key indicator that the US Fed is looking at to give it justification for tighter policy. We expect that the USD will continue to gain momentum as rising rates are quickly factored in. With growth in other developed markets, like the Eurozone and Japan struggling to gain a foothold, the risk is for further currency declines as the central banks continue to flood markets with liquidity. The ECB will also give its view on the outlook at its meeting this week.
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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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