Industrial metal basket ETP flows benefited the most as trade wars intensify

ETF Securities Industrial metal basket ETP flows benefited the most as trade wars intensifyIndustrial metal basket ETP flows benefited the most as trade wars intensify

ETF Securities Weekly Flows Analysis – Industrial metal basket ETP flows benefited the most as trade wars intensify

Highlight

  • Industrial metal basket ETP took the lion’s share of inflows surging the most since December 2017
  • Gold ETPs suffered outflows last week after hawkish comments by the Federal Reserve
  • Bargain hunters appear to drive inflows into crude oil ETPs ahead of the OPEC meeting on June 22

Industrial metal basket ETPs took the lion’s share of inflows, worth US$52.8mn extending last week’s trend of positive inflows. Caught in the cross fire of geopolitical trade wars, industrial metals as a group declined by 3.77% last week. Industrial metal prices also faced headwinds from weak Chinese economic data. Fixed asset investments grew by only 6.1% while industrial production grew by 6.8% in May according to National Bureau of Statistics (NBS). Bargain hunters appeared to take advantage of the price weakness as industrial metal basket ETP flows surged the most since December 2017.

In retaliation to the US tariffs, China’s Finance Ministry has imposed an additional 25% tariff effective on July 6 on a list of 545 product categories , covering nearly US$34bn in exports from the US. The list includes automobiles and agricultural products that might have an effect on manufacturers. Most metal markets continue to remain in deficit and we expect the current trade tariff’s to continue to generate considerable uncertainty within the supply chain.

Gold ETP outflows surged by US$41.4mn, reversing the prior two week’s trend of inflows after hawkish comments by the Federal Reserve . The stronger US dollar coupled with a more hawkish Federal Reserve, underpinned the weakness in gold prices that were declined 1.81% last week. Geopolitical risks that were previously supporting gold prices faded as the divergent interest rate policy projections at the key central bank meetings last week took centre stage. While the Federal Open Market Committee (FOMC) delivered another quarter point rate hike in the Federal Funds rate, this was largely priced in by markets. However the Fed’s forward guidance on its interest rate trajectory took the markets by surprise.

The Fed’s dot plot moved higher marginally in favour of two additional rate hikes this year, so four in total. Interestingly, it also anticipated a further three rate hikes of 25Bps in 2019 as the US economic outlook remains positive. Gold, that does not yield any interest came under significant pressure from the Fed’s more subdued outlook on inflation. The spread between the US 2 and 10-year yields declined to 38Bps its lowest level since 2007 reflecting the markets conviction in near term growth projections versus the future. In sharp contrast a day later, the European Central Bank (ECB) President Mario Draghi provided a more dovish forward guidance with no change in interest rates until the summer of 2019. The ECB remains far from normalizing policy, this lent further buoyancy to the US dollar as the Euro declined sharply adding further pressure on gold prices.

Crude oil ETPs received US$9mn of inflows last week reversing the trend of outflows witnessed over the last nine consecutive weeks. Oil prices are being dominated by rumours surrounding production cuts to be announced at the OPEC meeting in Vienna next week on June 22. Saudi Arabia is expected to raise production gradually however Venezuela and Iraq are not in favour of raising production according to sources close of OPEC.

European equity ETPs witnessed outflows worth US$9mn for the third week in a row. Dovish signals from the ECB helped European equities recover 1.04% last week. Profit taking appears to have driven outflows from European equity ETPs. The Euro slipped 1.35% versus the US dollar last week, helping European equities recover, as nearly 50% of revenues on European indices are generated internationally.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0)207 448 4330
E research@etfsecurities.com

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Investors appear to rotate from gold to silver ETPs

Investors appear to rotate from gold to silver ETPs

ETF Securities Weekly Flows Analysis – Investors appear to rotate from gold to silver ETPs

Highlights

  • Silver ETPs receive highest weekly inflows since January 2015.
  • Equity contrarians looking to buy Italian ETFs.
  • Long crude oil ETPs saw US$45mn outflows as WTI oil declined the most in 10 weeks.

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Silver ETPs receive highest weekly inflows since January 2015. Silver’s underperformance relative to gold has been correcting in recent weeks. The gold-to-silver ratio has declined to 78 on 25th May from a 2-year high of 82 reached in April. While gold remains under pressure from a rising interest rate environment in the US, silver has the potential to leverage off its industrial’s traits. With global purchasing managers indices seeing improvement in the start Q2, the outlook for industrial demand for silver is looking good. Silver had been in a supply deficit in since 2013 and the lack of capital expenditure in mines in recent years its likely to see that supply deficit persist. Growing demand from electronics (in particular in cars) and photovoltaics bodes well for the metal. Long silver ETPs saw US$97.3mn of inflows last week. Gold ETPs on the other hand saw outflows. Despite gold seeing gains toward the end of the week after the US-North Korea-South Korea summit experienced further turbulence, gold ETPs saw US$63.5mn outflows during the week as gold prices were predominantly falling.

Equity contrarians looking to buy Italian ETFs. The forming of an all-populist coalition government in Italy spooked the market and the FTSE MIB declined a good 4.5% last week. Prior to the events that caused further turmoil over the weekend, ETF investors appear to have sensed a buying opportunity. US$8.2mn of inflows into long FTSE MIB ETFs were the highest since July 2016.

Sugar ETPs saw largest outflows since July 2015 as investors appear to take profit. Sugar prices rose 7% last week as the market reassessed the extent of global over-supply. After a bumper cane crop (and strong crush thereafter), the market was conditioned to think that India would flood the market with high levels of exports. But it appears that India is happy to hold a larger inventory this year. At the same time, less favourable weather is likely to reduce supplies from Brazil and relatively strong oil prices are likely to see a higher amount of cane be diverted to ethanol production rather than sugar. Long sugar ETPs saw US$8.5mn of outflows last week as investors appeared to take profit on the recent price increase.

Investors appear to profit-take on industrial metals. Broad industrial metal prices have risen 1.5% after in the past month, after a period of decline. Investors appear to have taken profit on these moves. US$16.6mn of outflows last week were the highest in eight weeks. While the fundamentals on industrial metals remain supportive, near-term headwinds from an appreciating US Dollar could cap price gains.

Long crude oil ETPs saw US$45mn outflows as WTI oil declined the most in 10 weeks. WTI oil prices fell 5% last week as OPEC and Russia signalled they are ready to increase supply. It is not clear by how much they will increase production or to what extent the 14 member group (and 10 non-OPEC countries participating in the voluntary production adjustments) even agree with reducing production curbs. We expect more clarity after the 174th OPEC meeting scheduled on 22nd June.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0)207 448 4330
E research@etfsecurities.com

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Gold’s Muted Response Speaks Volumes

Gold’s Muted Response Speaks Volumes

Contributors to the text Gold’s Muted Response Speaks Volumes: Joe Foster, Portfolio Manager and Strategist, and Imaru Casanova, Deputy Portfolio Manager/Senior Analyst for the Gold Strategy

Gold Faced Selling Pressure Early in February Despite Normally Positive Conditions

In an environment that would typically be positive for gold, it appears gold faced selling pressure as investors searched for liquidity to cover margin calls and redemptions. Gold declined in February as increased market volatility and a drop in equity and bond markets failed to support demand for gold as a safe haven1. On February 2, the labor market report in the U.S. showed a strong rebound in average hourly earnings that was well above expectations. The U.S. dollar rallied and gold declined. Equity markets dropped, with the Dow Jones Industrial Average (DJIA)2 down almost 9% by February 8 (ending February down 4%), U.S. Treasury yields rose, and the U.S. dollar, rather than gold, was the beneficiary.

Weaker U.S. Dollar, Heightened Inflation Expectations Helped Gold Reach Month High

On February 14, January’s inflation report beat consensus, with headline inflation measured by the Consumer Price Index (CPI)3 accelerating to 2.1% year-on-year. U.S. Treasury yields continued their rise and the U.S. dollar weakened. Meanwhile, the equity markets and gold bounced back. Gold reached its high for the month of $1,353.70 per ounce on February 15.

Gold Rally Loses Momentum as U.S. Dollar Strengthens on Fed comments

However, the gold rally was short lived, as the markets priced in hawkish expectations ahead of the release of Federal Open Market Committee (FOMC) minutes on February 21. The Fed minutes themselves did not contain much new information, but confirmed the market’s expectations for three rate hikes this year. In addition, the testimony by new Fed chairman Jerome Powell to the House of Representatives’ Committee on Financial Services was viewed as optimistic, stating that he sees gradual rate hikes, and more importantly, an improved U.S. growth outlook. The U.S. Dollar Index (DXY)4 was up 1.7% during the month. Commodities were lower during February, which is also negative for gold. Gold closed at $1,318.38 per ounce on February 28, down 2% or $26.78 per ounce for the month.

Demand for Gold ETPs up YTD Helping Bullion Outperform Gold Stocks

Demand for gold bullion-backed exchange traded products (ETPs) declined in February, with holdings down about 0.3% for the month. This followed a 1.3% increase in holdings in January, resulting in a net 1.1% increase year to date as of February 28. We track the flows into the gold bullion ETPs as we believe investments in those products typically represent longer-term, strategic investment demand for gold and, as such, provide an excellent proxy for the direction of the gold market.

Gold stocks underperformed gold, with the NYSE Arca Gold Miners Index (GDMNTR)5 falling 9.91%, and the MVIS Global Junior Gold Miners Index (MVGDXJTR)6 dropping 6.7% during the month. The junior companies caught up with their larger peers after underperforming in January.

Gold Stocks Impacted by Reaction to Mixed Q4 Reporting, Not Fundamentals

While many gold companies reported positive fourth quarter 2017 operating results, earnings/financial results were mixed and guidance for 2018, in some cases, seems to have surprised the markets. The negative sector headlines put significant selling pressure on the stocks. In many cases, these negative surprises have shorter-term effects, and do not change the companies’ fundamental valuations. However, more recently, it appears that selling pressure might be intensified by headline-driven, algorithm-based trading where the longer-term fundamentals are ignored.

The End of the Low Interest Rates Era and the Multi-Decade Bond Bull Market?

It looks like the post-crisis era of ultra-low, below-market interest rates and the multi-decade bond bull market both came to an end in February. In early February the simultaneous fall in both stocks and bonds caught the markets very off guard. Five- and 10-year U.S. Treasury rates jumped up and out of a downtrend that goes back to 1985. The stock market sell-off was a taste of the unintended consequences of Fed policies that encourage investors to take on more risk, driving markets in one relentless direction for nine years. Funds designed to thrive in a low volatility environment were forced to sell in a reinforcing feedback loop, exposing new systemic risks.

Bitcoin Crash Another Sign that Easy Money May Be Over

Another sign of the end of an era of easy money was the bitcoin crash. From its high of $19,511 in December, bitcoin declined 70% to its $5,922 low on February 5. It has since recovered to around $10,000. Bitcoin has already gone through one crash this year and the value of the emerging technology, while potentially disruptive, is still unproven.

Investor Complacency Remains Despite Volatility, Rising Debt, Rising Rates

Safe haven investments showed little reaction to the stock market selloff. Gold and the dollar essentially trended sideways, while U.S. Treasuries headed lower. So far investors are treating the stock market volatility as an overdue correction, however we see it as the beginning of a secular shift in markets and investor psychology that brings more volatility and risk going forward. Perhaps the prelude to a bear market and economic downturn.

It looks like a higher interest rate regime is taking hold. It is not yet clear whether it is being driven by inflationary expectations, Fed rate increases, increasing fiscal deficits, or a combination of all three. Protectionist trade policies, wage pressures, and a weak dollar may cause core inflation to trend through the Fed’s 2% target, which may bring more aggressive rate policies. Fiscal deficits projected to rise above $1,000,000,000,000 in a couple of years will cause the Treasury to issue huge quantities of debt at the same time the Fed is reducing its $4,000,000,000,000 hoard of U.S. Treasuries, mortgage-backed securities, and agency debt. (FYI…12 zeroes equals a trillion).

A new era of higher interest rates brings added uncertainty. As these rates rise, equity risk premiums get squeezed, making stocks less desirable. According to Gluskin Sheff7, a 50 basis point rise in rates costs the economy $250 billion in debt service annually. We do not know how the new Fed management will respond to volatile markets and potentially weaker economic growth. Unwinding the Fed balance sheet (quantitative tightening) is an unprecedented financial experiment. Is the February volatility an indication of how a system dominated by passively managed funds, algorithms, and automation will behave?

We believe the muted response from gold and other safe haven investments suggests complacency continues to dominate the markets. In fact, the University of Michigan Consumer Sentiment Index’s mid-month reading for February rose unexpectedly to nearly a 13-year high. As the year unfolds, we expect an erosion of complacency and confidence that benefits gold.

IMPORTANT DISCLOSURE

1Safe haven is an investment that is expected to retain its value or even increase its value in times of market turbulence.

2The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

3The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

4U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY does this by averaging the exchange rates between the U.S. dollar and six major world currencies: Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish kroner, and Swiss franc.

5NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.

6MVIS® Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.

7Gluskin Sheff + Associates Inc., a Canadian independent wealth management firm, manages investment portfolios for high net worth investors, including entrepreneurs, professionals, family trusts, private charitable foundations, and estates.

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Global political upheaval offers a silver lining to ETP flows

Global political upheaval offers a silver lining to ETP flow

ETF Securities – Global political upheaval offers a silver lining to ETP flows

Highlights

  • Silver ETPs attracted the lion’s share of inflows.
  • Inflows into global equity ETPs led by robotics rose to their highest level in 8 weeks.
  • Safe haven currency seekers drove inflows into long yen ETPs to their highest level on record.

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Silver ETPs attracted the lion’s share of inflows, worth US$54.5mn, marking its highest level of inflows since September 2017. The main catalyst has been the political tensions emanating between the UK and Russia over the poison attack on a former Russian spy in England. Britain has imposed sanctions on Russia and in retaliation Russia intends to expel British diplomats. The US, France and Germany have also shown their support for the UK and hold Russia responsible for the poison attack.

Added to that, the frequent shake-up of the Trump Administration, which last week saw the dismissal of secretary of state Rex Tillerson owing to differences over foreign policy issues, have raised concerns over protectionist US policies. Silver is attractively priced, with the gold to silver price ratio remaining elevated relative to recent history. We continue to have a positive view on silver’s fundamentals owing to a strong industrial cycle and constrained mine supply and expect silver to play catch-up in 2018.

Gold ETP flows reversed the prior week’s anomaly of inflows in 2018 by posting outflows of US$28.7mn. Gold prices tend to show weakness in the run-up to Fed meetings. This was evident last week as investors shifted their attention to this week’s Federal Reserve policy meeting, gold prices headed for their biggest weekly drop in a month. The key takeaway will be the likelihood of four rate hikes in the Fed’s projected dot plot for 2018.

Inflows into global equity ETPs, led by robotics worth US$24mn rose to their highest level in eight weeks. Looming political risks and rising protectionist policies caused global equity markets to end the week on a weaker footing. As a consequence investors sought to increase exposure to niche sectors within technology such as robotics and cybersecurity.

Redemptions from US equities totalling US$9.8mn led by Master Limited Partnership (MLPs) rose to their highest level since June 2015. Subsequent to the ruling from the Federal Energy Regulatory Commission (FERC) last week disallowing income tax recovery on interstate pipeline contracts, the MLP industry faced a broad sell off. We believe this is an overreaction. We expect pipelines owned by MLPs that cross state lines and rely on FERC-regulated tariffs to be the most impacted by this ruling.

Long Yen ETPs attracted the highest inflows on record amounting to US$25.2mn as investors took shelter among safe haven currencies amidst the global political upheaval.

Tighter monetary policy signalled by Norway’s central bank led to US$9.3mn of outflows from NOK ETPs. Last week Norway’s central bank signalled it will raise interest rates faster than expected supported by higher growth and a change in the inflation target. This led buoyancy to the Norwegian Krona, that surged 0.9%, reaching its highest level since November 2017.

Important Information

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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 (the “FCA”).
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

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 fit.

 

Investors appear to shrug off trade-war risk for now

Investors appear to shrug off trade-war risk for now

ETF Securities – Investors appear to shrug off trade-war risk for now

Highlights

  • Inflows into industrial metal baskets of US$9mn highlights cyclical optimism as investors appear to shrug off threats of a trade-war.
  • Gold ETPs attracted USD14.5mn, marking the first substantial inflow in six weeks.
  • Cocoa rally sparks profit taking

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Inflows into industrial metal baskets of US$9mn highlights cyclical optimism as investors appear to shrug off threats of a trade-war. Although base metal prices fell last week after the Trump Administration applied tariffs to imports of steel and aluminium in the US, many ETP investors shrugged off the event. The tariffs could tighten the supply of metal coming from China. As a serial overproducer, cutbacks from China would be welcome news and could even increase prices; China is already trying to reduce capacity in steel and aluminium and this should push the country further along in its efforts. The impact on the broader commodity complex will largely depend on the reaction from other countries. If a tit-for-tat trade war breaks out, we could see international trade decline and it could be the beginning of a downturn in economic prosperity for many countries, which could hurt cyclically exposed assets. The softening of rhetoric from the US by the end of the week could mean that other countries refrain from strong reciprocal measures, which could lower the risk of a severe escalation of a trade war.

Gold ETPs attracted USD14.5mn, marking the first substantial inflow in six weeks. Rising Treasury yields and a pause in US Dollar weakness has made gold less attractive of late. However, gold’s role as hedge to adverse events makes it attractive to investors who are worried about geopolitical events turning ugly. So while investors continued to build positions in cyclical assets (see above), they placed hedges against the threat of a trade war breaking out after the Trump Administration applied tariffs to imports of steel and aluminium in the US by increasing allocations to gold.

US$15.9mn of inflows into short USD ETPs. Last week’s flows seem to indicate that investors are betting against the temporary reprieve in US Dollar weakness. Most of the flows went into long Japanese Yen, but long Sterling and long Euro were also beneficiaries.

Cocoa rally sparks profit taking. Between August 2016 and May 2017, cocoa ETPs saw close to US$84mn of inflows, when prices fell close to 45% over that period. Investors appeared to be bargain-hunting. Now that cocoa prices are rising once again (+35% since December 2017), many investors may be thinking of taking profit. Outflows accelerated last week to US$18.9mn (the highest weekly outflow) as prices rose 6.6% last week alone. Prices are rising after the International Cocoa Organisation (ICCO) said that it expects the surplus in production this year to be lower than last year and indeed revised downward the scale of stock overhang from last year. The presence of Cocoa Swollen Shoot Virus (CSSV) in Cote d’Ivoire (the largest cocoa producer) could limit the regions’ producing capacity in future years as maintenance programmes need to be undertaken to reduce the spread of the virus. The price of cocoa is already reacting.

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