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Markets Focus on Greece as Finance Ministers Meet

ETFS Multi-Asset Weekly

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Markets Focus on Greece as Finance Ministers Meet

Highlights

Rig count drop drives oil price rally.
Developed equity markets rise on growing optimism.
USD lifts on jobs, but can it sustain upward momentum?

An upside surprise in US jobs figures provided a lift to cyclical assets and the US Dollar last week. This week the market will focus on the Chinese inflation, money and loan supply data for signs that its central bank will have to ease policy further. Last week, the People’s Bank of China made broad cuts to the Reserve Requirement Ratio for the first time in over 2 years, making it easier for banks to lend. The Euro area Q4 2014 GDP release and Finance Ministers meeting on Greece this week will likely keep volatility in Europe high.

Commodities

Rig count drop drives oil price rally. Brent and WTI rallied 13% and 15% respectively last week on signs of tightening supply. According to Baker Hughes’ rotary rig count, there was a 16% contraction in US rig counts in January 2015. We believe that OPEC countries will see these developments as a positive move and will motivate a cut in its June 2015 meeting. We believe that the cartel will move with caution recognising that despite the recent reduction in rig counts, US production could easily rise once again. Saudi Arabia, the largest producer in the cartel is reluctant to give up market share and will wage the price war as long as it takes to reassert its market dominance. News that Saudi Aramco has reduced its contract price for March Arab light crude in Asia may take some of the steam out of the recent rally. Elsewhere lean hog prices fell by 9.5% as the industry is showing signs of recovery from the Porcine Epidemic Diarrhea virus that led to mass culling last year.

Equities

Developed equity markets rise on growing optimism. Developed equity markets regained ground lost from the disappointing Q4 US GDP release the week prior. The week ended with an upside surprise in jobs numbers in the US. With an increasing number of central banks across the globe willing to switch to an easing mode, equity markets are becoming confident that growth will not be allowed to stall. Poor manufacturing PMI data in China led to a 3.3% slump in the MSCI China A-Share index, which was only temporarily reversed by the cut in reserve requirement ratio by the country’s central bank. The recent rebound in oil has lifted sentiment toward Energy infrastructure Master Limited Partnerships with the Solactive US Energy Infrastructure MLP Index TR gaining 4.5% over the week. Gold miners advanced 4.2% last week, with gold price stability aiding their ascent.

Currencies

USD lifts on jobs, but can it sustain upward momentum? After the boost for the USD on the back of the better-than-expected payrolls numbers and with retail sales the only notable economic release in the US this week, moves against the USD are likely to be determined from other currency news. Eurozone GDP is likely to keep the pressure on the Euro. There is no evidence to indicate the Eurozone economic situation is improving and downside risks to the Euro are expected to increase going into the release. Both the UK and the Eurozone release industrial production data, giving an idea of whether the growth momentum in the UK is following downward in the wake of the Eurozone. Meanwhile, Governor Carney will again have to explain the reasons behind inflation falling well below target. Certainly oil price weakness is not helping and if the Governor indicates that lower oil prices could be a persistent cause of deflationary pressure, then the GBP will suffer as a result of fading rate tightening expectations.

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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US Equities Outpace Eurozone, as USD Strength Hits Commodities (For Now)

ETFS Multi-Asset Weekly – US Equities Outpace Eurozone, as USD Strength Hits Commodities (For Now)

Highlights

Arabica coffee jumps over 14% in a week on supply fears.
US energy infrastructure continues to benefit from the surge in US oil supply.
US jobs confirm robust recovery and fuel further USD upside momentum.

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While negative sentiment towards commodities and global equities prevailed last week, stronger fundamentals helped to lift the US energy infrastructure sector and the US Dollar. The striking improvement in the US economy and labour market should be supportive of cyclical assets once investors return to focus on the positive underlying conditions. With US non-farm payrolls surprising the market on the upside last week, investors will be keeping a close eye on the FOMC minutes this week as the recent conservative tone of the Fed could change quickly if the economic rebound continues, keeping USD buoyant.

Commodities

Arabica coffee jumps over 14% in a week on supply fears. Brazil’s worst drought in decades saw Arabica coffee prices soaring 88% since the beginning of the year. Prices have been rising on the back of fears that continued dry weather in Brazil, the biggest producer, might negatively impact next year crop. However, exports continued to increase despite fears of 2015 tightness. Wheat also continued to rise last week, as elevated domestic prices for the grain in Russia rendered Russian supply non-competitive on the market. Russia is a major player in the wheat market, accounting for 10% of global wheat exports in 2013. Meanwhile, nickel lost over 7% last week, as LME stocks surged 37% this year. However, with Indonesia, the biggest producer, sticking to an ore export ban that has already reduced the expected surplus, the recent correction appears excessive.

Equities

US energy infrastructure continues to benefit from the surge in US oil supply. The Solactive US Energy Infrastructure MLP Index TR increased by 1.3% as US oil supply nears its level 30 years ago. Meanwhile, president Draghi indicated last Thursday that it will continue to keep policy supportive of the Eurozone economy, keeping interest rate low at 0.5%. The ECB meeting failed however to support European stocks, down for the second consecutive week on lower-than-expected manufacturing PMI for September, reinforcing growth worries in the region. Short European indices rose 6% on average over the past week while the EURO STOXX 50® Investable Volatility Index witnessed its highest weekly gain since February 2013, up 10.1% over the same period. In contrast, the MSCI China A Index posted gains for the second week in a row supported by better official manufacturing activity in September.

Currencies

US jobs confirm robust recovery and fuel further USD upside momentum. Better-than-expected US jobs highlighted the underlying strength of the labour market and the rising potential of household consumption. Indeed, the unemployment rate dropped below 6% for the first time in six years. While investors will be keeping a close eye on the FOMC minutes this week, the recent conservative tone of the Fed is likely to change quickly if the strength across the economy continues. The dual mandate of the Fed is being confirmed on the jobs front, and we expect inflationary expectations too begin to follow and to move the Fed onto a tightening path in H1 2015. Such expectations necessarily will be supportive of further broad based USD strength. Meanwhile, the UK growth momentum continues to fade. Bank of England policymakers are split on when to rate hikes, we expect the latest developments to help unify the Board, and keep downward pressure on GBP.

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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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Investor Sentiment Improves Amidst Eurozone and UK Uncertainty

ETFS Multi-Asset Weekly Investor Sentiment Improves Amidst Eurozone and UK Uncertainty Investors’ sentiment improved last week, boosting industrial metals and China A shares, as Russia and Ukraine made progress towards the termination of the conflict and China PMI surprised on the upside. While geopolitical risks appear to be subsiding, uncertainty over the recovery in the Eurozone and the Scottish Independence vote in the UK remains, weighing on both the Euro and Sterling.

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Commodities

Nickel jumps 4% on Philippines ban reports. Nickel is the best performing industrial metal year-to-date, up 40%, following on from an export ban in Indonesia, nickel’s biggest producer. So far China has been able to supply the high-grade laterites required to aliment its nickel pig iron industry from the Philippines. However, should the rumours of a ban in the Philippines be confirmed, about 45% of mine supply would be taken off the market. Zinc also rallied last week, consolidating the gains achieved during the past few months. Zinc is expected to be in a deficit for a second consecutive year in 2014 on planned mine closures and strong demand for galvanised steel from China. Meanwhile, wheat and corn continued their slump, losing 7.3% and 6.2% respectively last week on abundant harvest expectations. However, with prices at multi-year lows and frost concerns in some parts of the US threatening to reduce expected production, prices could recover part of their losses over the next few weeks.

Equities

European equities surge on ECB unexpected cut in rate. Last week saw European equity benchmarks rising after the ECB announced fresh stimulus to support Eurozone activity, reviving equity market sentiment with leveraged European indices gaining 6.1% on average over the past week, the highest weekly change since December 2013. However, uncertainty over the Scottish Independence vote has seen UK equities sink in early trading, and downward pressure is likely if polls indicate independence parties keeping the upper hand. Recent USD strength following the ECB meeting caused the gold price and the DAXglobal® Gold Miners Index to tumble, down 1.6% and 4.7% respectively, erasing the previous week’s gains. Meanwhile, better-than-expected August China PMI gave a boost to the MSCI China A Index, with price momentum likely to continue as China economy recovers.

Currencies

British Pound plunges on Scottish independence polls. The pound touched 10- month lows as polls show that Scottish independence voters have the lead going into the independence vote in two weeks time. The Pound is likely to remain under pressure in the near-term as volatility rises, but investors will be closely watching polls in the lead-up to the September 18 vote. The Euro dropped to its weakest level in 14 months after the worsening inflation outlook and the fading economic momentum caused the ECB to surprise the market with further policy support. The ECB cut its policy rates by another 10bps and announced an asset backed security purchase programme and a covered bond purchase programme to revive the flow of credit to the real economy. We expect the USD to strengthen despite last week disappointing jobs report. While US jobs missed expectations, we feel rising US growth will prompt rate differentials to widen in favour of the US and support the USD.

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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