Likely supply disruptions lead to industrial metals rally
ETF Securities Weekly Flows Analysis – Likely supply disruptions lead to industrial metals rally
Highlight
Industrial metal basket ETPs see largest inflows since February as supply disruptions likely
Energy sector ETP flows continue to bifurcate – energy baskets attract inflows while crude oil ETPs suffer outflows
Investors appear to bet on a stronger Euro vis-à-vis the US Dollar
Industrial metal basket ETPs see largest inflows since February. Industrial metals gained a strong tail-wind last week, rising 2.9%, as trade-wars escalate. Inflows of US$46.1mn in to industrial metal ETPs followed. Trade restrictions will likely disrupt supply chains and increase the scarcity of many metals. Protectionist pressures initiated by the US -including imposing tariffs on EU, Canadian and Mexican steel and aluminium imports and a raft of tariffs on Chinese imports have been met by announcements of retaliation. This tit-for-tat ratcheting of a trade war may escalate further.
Most base metals are already in a supply deficit. Trade wars further complicates metal availability. In addition to trade wars, US sanctions placed on Oleg Deripaska, the largest shareholder of Rusal (the world’s largest aluminium producer), have led to tightness in aluminium. The world largest copper mine, Escondida, has resumed wage negotiation after postponing them last year. Last year the mine underwent a 43-day strike following the impasse in wage negotiations. Investors fear a déjà vu moment, as the unions have placed a very ambitious request forward. The closure of a large Indian smelter and US Dollar weakness have also contributed to copper rising to a 4 ½ -year high. Copper ETPs saw US$13.1mn of inflows last week, the highest since April 2018.
Energy sector ETP flows continue to bifurcate. Continuing a trend that started last week, long energy basket ETPs gained inflows of US$29.6mn, reaching the highest weekly inflows since December 2015. While long crude oil ETPs suffered further outflows of US$ 19.9mn, extending outflows for the ninth week in a row. Oil prices endured a lot of volatility last week. A higher than expected build in crude and product in the US sent prices lower. Added to that were reports that the US has asked Organization of Petroleum Producing Countries (OPEC) to raise production by 1 million barrels per day. With OPEC meeting later this month to discuss policy, we expect oil prices to remain volatile as the market tries to guess the what the 14-member cartel will do next. Oil prices started to rise again toward the end of the week as Iran signalled that it will restart nuclear enrichment as soon as the current nuclear deal collapses. Such cavalier discussion could repel the EU who have thus far been seeking to circumvent the US’s extraterritorial sanctions in favour of keeping trade open with Iran.
Investors appear to bet on a stronger Euro vis-à-vis the US Dollar. Inflows into long Euro, short US Dollar ETPs rose to a four week high of US$9.4mn, reversing all of the prior week’s outflows from the pair. The Euro has seen a lot of volatility over the past few weeks during the sage of the formation of a new Italian government comprising of parties from the political extremes. Today, however, a commitment from the new Italian Finance Minister to the Euro and a pledge to avoid financial instability has offered the currency some support.
ETF investors feel the Italian equity shakeout is overdone. We saw the third consecutive week of inflows into Italian equities, with US$3.9mn last week. Although Italian equities have been falling over the past month, the conciliatory words from the Italian Finance minister have led to a 2% rally in the Italian FTSE MIB today at the time of writing. ETF investors also sold US$3.7mn from broad European equity short ETPs last week, likely taking profits on a month of declining prices.
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ETF Securities Research team
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Gold’s safe haven status intact as inflows increase albeit moderately for the seventh week in a row.
Gold miners lose their allure as we see outflows for the first time in 10 weeks.
Investors turn bearish on German equities ahead of the ECB meeting.
Gold ETP purchases of US$63.2mn mark seventh consecutive week of inflows, while silver ETPs resume inflows of US$1.4mn. After declining 3.05% in August, gold prices found some respite last week following the release of weaker than expected non-farm payrolls data. This further complicates the decision of the Federal Reserve that would need to weigh the impact of the weaker jobs data and ISM manufacturing figures ahead of its next interest rate meeting in September. According to the Fed funds futures, the probability of a rate hike in September has decreased considerably to 26% from 34%. We continue to hold onto our view that the Fed will raise rates this year. However, the latest data releases suggest this is more likely in December than this month. Elsewhere in the sector, platinum ETPs continued to record outflows for the tenth week in a row. The seasonally adjusted US vehicle sales in August came in short of expectations despite considerable discounts provided by dealers, weighing on future demand expectations for palladium.
Gold miner’s equity ETPs see first outflow worth US$9mn in 10 weeks. A marked change in sentiment triggered by the recent decline in gold prices, has led to profit taking. Gold mining stocks are currently worth twice their levels in 2015 are now being perceived as expensive.
Investors turn bearish on European equities as inflows into short German and Italian equity ETPs surge to their highest level in 11 and 15 weeks respectively. Outflows from long German equity ETPs rose in 4 of the last 5 weeks. We believe investors are positioning cautiously ahead of an eventful economic week. The European Central Bank meeting on Thursday remains top of the agenda with a new set of staff projections on inflation and GDP to be released. The market will be poised for any clues about an extension of the Asset Purchase Programme beyond March 2017 or any tweaks to eligibility criteria for government bond purchases in future policy meetings. Revisions to estimates of European GDP growth and German Industrial production are due at the start of the week.
In currencies investors unwind short EUR positions versus long USD ETPs for the second consecutive week by US$4.8mn. After the US dollar strengthened for 2 consecutive weeks, profit taking prompted investors to unwind the short EUR, long USD ETPs positions.
Wheatinflows rise to US$9.6mn marking its highest level in six weeks. Consensus remains for abundant global supply as forecasts for production in 2016/17 are raised. As prices reached a 10-year low on Monday, bargain-hunting investors bought wheat ETPs. They benefited from price-supporting news in the latter half of the week. The European Commission revised downward its forecast for the EU soft wheat crop by nearly 8%. Wheat imports into India are expected to rise as its wheat stock has declined to the lowest level in 10 years, which has also supported prices.
Video Presentation
Aneeka Gupta, Research Analyst at ETF Securities provides an analysis of last week’s performance, flow and trading activity in commodity exchange traded products and a look at the week ahead.
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