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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• Precious metals rally as industrial commodities slide on negative Chinese sentiment.
• European stocks sell-off as China reforms hit luxury goods and auto sectors.
• Chinese Renminbi devalued by nearly 5% as new reforms implemented.
The decision by the Peoples Bank of China (PBOC) to devalue its currency by a cumulative 5% last week, the most on record, and to change its fixing methodology for CNY caused a negative reaction across asset classes. Investors became more defensive, reducing positions in cyclical assets. Commodity sectors exposed to China, like energy and industrial metals, saw prices slide in a knee-jerk reaction as a result. USD weakness helped commodity markets rebound, as expectations of an interest rate hike began to be pushed further back in 2015. Many commodity prices initially declined by more than the change in the CNY/USD rate, indicating a sentiment driven change rather than a fundamental one.
Commodities
Precious metals rally as industrial commodities slide on negative Chinese sentiment. WTI and Brent crude oil benchmarks fell 5.47% and 2.47%, respectively reaching the lowest level in over six years, with the devaluation of the CNY thought by many investors to be a signal of declining future demand. Significant negative sentiment over the outlook for Chinese economic growth appears to be priced in to a range of commodity markets, particularly energy and industrial metals sectors. We expect the commodity price weakness to largely transitory many prices initially declining by more (in USD terms) than the devaluation of the CNY/USD rate, indicating a sentiment driven change rather than a fundamental one. Gold and silver were the largest beneficiaries of the China FX decision, as some risk aversion took hold as investor sentiment waned.
Equities
European stocks sell-off as China reforms hit luxury goods and auto sectors. European equity benchmarks posted losses early in the trading week, in line with other major global bourses, as investors digested the potentially negative implications of a weaker Renminbi for the Chinese economy. Sectors like materials, luxury goods and autos were some of the worst affected. The surprisingly weaker Q2 GDP numbers from Germany and France also adversely affected investor sentiment. In contrast, the Chinese sharemarkets didn’t overreact to the news as many other bourses did, posting gains for the week, despite weaker-than expected numbers on industrial production and retail sales.
Currencies
Chinese Renminbi devalued by nearly 5% as new reforms implemented. The significant policy change was to set the new Renminbi fixing rate at the previous day’s closing spot CNY rate. The PBOC’s move allows greater exchange rate flexibility and transparency of CNY pricing in its ongoing reform of the Renminbi and was not intended to be a ‘currency war’. We feel it shows progress towards a more market determined rate and is beneficial for its IMF SDR aspirations despite the IMF noting that the Chinese policy change has ‘no direct implications’ for its SDR review. Both the AUD and NZD lost ground on the markets expectations of more expensive exports to China crimping demand. Further softness from these two currencies is expected, with their respective central banks maintaining their easing biases. Meanwhile, the Swedish Krone was the strongest G10 performing G10 currency, after CPI numbers surprised to the upside which could keep the Riksbank from cutting rates at its next meeting.
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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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 (”FCA”).
Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.
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 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 FSA 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.
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.
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Carbon rallies on hopes of reform to emissions trading scheme.
European stocks advance following the launch of QE.
US jobs in focus for USD after GDP disappoints.
The Federal Reserve Open Market Committee sent a mixed message, acknowledging the softness in prices while pointing to strength in economic expansion and jobs. US Dollar appreciated, focusing on the implications of economic strengthening on the likelihood of a rate rise. The optimism in economic activity may sit at odds with the slightly disappointing GDP figures released later last week and this week’s jobs numbers could drive a reversal in Dollar strength if they prove to be disappointing.
Commodities
Carbon rallies on hopes of reform to emissions trading scheme. Carbon rose 4.1% after proposals to amend the EU carbon trading scheme were rejected by the European parliament. The failure of the reforms creates an opportunity for the implementation of more ambitious changes which would take affect sooner relieving the current glut of carbon credits. In the agricultural space the price of soybean oil plunged 7.6% as US regulators approved a request for Argentinian biofuel makers to export to the US market. This created fears that the US market would be awash with supply from its South American counterparts. During the week, exchange traded sugar prices fell 6.7% following signals that Indian authorities would launch a production subsidy for raw sugar. The subsidy would make it economically viable for sugar mills in India to begin exporting onto global markets before international competitors like Brazil and Thailand begin to do so later in the year.
Equities
European stocks advance following the launch of QE. European stocks ended the week higher after experiencing higher volatility. European stock markets remain buoyed by the ECB announcement of QE but face uncertainty over developments in Greece and the approach of the newly elected left-wing Syriza government to international debt negotiations. The result was that the EURO STOXX 50® Investable Volatility Index increased by 3.3% during the week. Elsewhere, the Federal Open Market Committee (FOMC) signaled, after its first meeting, that it is still on track to raise short term interest rates this year recognizing the solid pace of economic growth in the US. The prospect of higher US rates caused the gold price to drop 2.1% and in turn the DAXglobal® Gold Miners Index to fall 4%.
Currencies
US jobs in focus for USD after GDP disappoints. With the US Dollar continuing its surge higher against most major currencies last week, the risk of a correction increases, especially if the underlying economic data disappoints. The Fed broadly maintained its guidance about monetary policy, but if the weakening global situation begins to have a bigger impact on the domestic US economy, that could all change quickly. To that end, the key releases for the USD this week are ISM manufacturing index and the jobs data on Friday and if they disappoint as the Q4 GDP data did then there is likely to be a negative reaction from the USD. Markets will likely push back expectations for a rate hike, which is priced in for September currently. Both the Reserve Bank of Australia and Bank of England rate decisions are likely to take somewhat of a back seat to US economic releases, with the BOE expected to keep policy unchanged. Meanwhile the risk for the AUD is a rate cut as the economic recovery remains sluggish. Currently markets are indicating a 65% chance of a cut.
For more information contact:
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
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 (”FCA”).
Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.
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 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 FSA 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.
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.
Other than as set out above, investors may contact ETFS UK at +44 (0)20 7448 4330 or at retail@etfsecurities.com to obtain copies of prospectuses and related regulatory documentation, including annual reports. Other than as separately indicated, this communication is being made on a ”private placement” basis and is intended solely for the professional / institutional recipient to which it is delivered.
Third Parties
Securities issued by each of the Issuers are direct, limited recourse obligations of the relevant Issuer alone and are not obligations of or guaranteed by any of UBS AG, Merrill Lynch Commodities Inc. (”MLCI”), Bank of America Corporation (”BAC) or any of their affiliates. UBS AG, MLCI and BAC, Shell Trading Switzerland, Shell Treasury, HSBC Bank USA N.A., JP Morgan Chase Bank, N.A., Deutsche Bank AG any of their affiliates or anyone else or any of their affiliates. Each of UBS AG, Merrill Lynch Commodities Inc. (”MLCI”), Bank of America Corporation (”BAC) or any of their affiliates. UBS AG, MLCI and BAC, Shell Trading Switzerland, Shell Treasury, HSBC Bank USA N.A., JP Morgan Chase Bank, N.A. and Deutsche Bank AG disclaims all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might have in respect of this document or its contents otherwise arising in connection herewith.
”Dow Jones,” ”UBS”, DJ-UBS CISM,”, ”DJ-UBS CI-F3SM,” and any related indices or sub-indices are service marks of Dow Jones Trademark Holdings LLC (”Dow Jones”), CME Group Index Services LLC (”CME Indexes”), UBS AG (”UBS”) or UBS Securities LLC (”UBS Securities”), as the case may be, and have been licensed for use by the Issuer. The securities issued by CSL although based on components of the Dow Jones UBS Commodity Index 3 month ForwardSM are not sponsored, endorsed, sold or promoted by Dow Jones, CME Indexes, UBS, UBS Securities or any of their respective subsidiaries or affiliates, and none of Dow Jones, CME Indexes, UBS, UBS Securities, or any of their respective subsidiaries or affiliates, makes any representation regarding the advisability of investing in such product.
