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Agricultural Commodities Rally

Agricultural Commodities Rally – ETF Securities Commodity ETP Weekly

• Inflows into long oil ETPs highest in 14 weeks, as investors return to bargain hunting.

• Profit-taking led to US$36.0mn outflows from long wheat ETPs.

• Long nickel ETPs see largest inflows since November 2014 on the back of bargain hunting.

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The ‘No’ campaign in the Greece’s referendum yesterday received more than 60% of votes, emboldening the Greek government’s stance to reject its creditors terms. Failure to make progress in debt negotiations elevates the risk of a default on the €3.5bn that is owed to the ECB on 20th July. A default on that bond would almost certainly lead to the emergency liquidity assistance (ELA) being switched off and throw Greek banks into an untenable position. Gold has surprisingly not reacted to the events but that could change as worst-case scenarios crystalize. Agricultural commodities have clearly been outperformers in the past week. As the strengthening El Niño weather pattern changes crop growing conditions, we believe agricultural commodities will continue to offer investors strong opportunities.

Inflows into long oil ETPs highest in 14 weeks, as investors return to bargain hunting. A rise in rig counts in the US, the first since December 2014, drove WTI crude oil prices down 4.8%. Brent fell by 1.8%. As we have long argued, the rally in oil prices since March has been premature and has the potential to delay the supply cuts the industry needs. The increase in oil rigs is a confirmation that that incentive to cut production has waned. The necessary price decline should see that production is indeed pared back over the coming months. The potential lifting of sanctions against Iran should also weigh on oil prices in the near term. While a July 1st nuclear deal deadline passed with no agreement, a new deadline of 7th July has been set and talks are continuing. We expect high cost conventional oil producers to suffer the greatest loss in market share when prices fall, setting the scene for the nimble US shale oil industry to rebuild in due course. ETF securities long oil ETPs received US$49.3mn of inflows last week.

Profit-taking led to US$36.0mn outflows from long wheat ETPs. Wheat rallied close to 18% in 4 days, before paring gains to 10.1% for the week. A USDA report confirmed that wheat acreage planted this year will be lower than last year. The market took this very positively, although gains were pared once it was acknowledged that planting intentions (survey of farmers in March) had actually called for deeper cuts to growing. The profit-taking led to the largest weekly outflows in wheat ETPs since their inception in 2006. We believe that the strengthening El Niño weather pattern threatens to reduce global wheat production this year and opens further opportunities for investors to go long. El Niño tends to make the Asian sub-continent around India and Australia more dry than usual, which would crimp supplies from the large producing countries. Although the monsoon in India had gotten off to a brisk start in June, last week rain had slowed to below normal levels, the typical hallmark of the El Niño suppressing the monsoon.

Long nickel ETPs see largest inflows since November 2014 on the back of bargain hunting. Nickel fell 3.9% last week to a six-year low, mainly driven by technicals after the nickel breached the $12,000 psychological threshold. We believe that fundamentals will reassert. Declining nickel pig iron production in China, stronger demand from the European stainless steel market and reduced nickel ore availability will be key catalysts. Long nickel ETPs saw US$8.8mn inflows.

Key events to watch this week. Investors will continue to be distracted by the events unfolding in Greece after the ‘No’ vote in the referendum yesterday. The Australian Bureau of Meteorology will provide an El Niño update tomorrow.

Video Presentation

Nitesh Shah, 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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ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

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Investor Sentiment Dulled as USD Gains Momentum

ETFS Multi-Asset Weekly Investor Sentiment Dulled as USD Gains Momentum

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Highlights

OPEC in focus, but production cuts unlikely.

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.

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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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.

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UK Averts Coalition Chaos

ETFS Multi-Asset Weekly

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Highlights

Arabica coffee slid 4.2% as Colombian production continues to rise.

FTSE 100 recouped weekly losses after the election result.

Euro downside risk as Greek tension mounts.

Contrary to pre-election polls, the UK has managed to secure a majority government, averting the chaos that many had expected would follow in forming a stable coalition. UK equities and the Pound Sterling strengthened on the news after a week of losses. Meanwhile, with a debt payment due to the IMF tomorrow by Greece, the market is seeking hedges against a potential accident should Euro area finance ministers fail to avoid brinkmanship in their discussions with the cash-strapped nation today. The Chinese central bank cut interest rates yesterday, providing a tailwind for Chinese equities and cyclical commodities.

Commodities

Arabica coffee slid 4.2% as Colombian production continues to rise. The Colombian Coffee Growers Federation reported that the country’s coffee production for April grew 11.06% year-on-year. However, Colombia only produces 11% of global Arabica output. Brazil who produces 45% of global output, has had significant drought damage to its coffee bushes in 2014 threatening the yield in 2015. While some were optimistic about a reversal of that damage due to beneficial rain in Minas Gerais (a key growing area) in recent months, precipitation over the past week has moderated significantly. Added to that, a firmer Brazilian Real removes a catalyst for stock-offloading by Brazilian farmers. We believe that coffee prices could benefit from a tightening in supply from Brazil. While zinc, nickel and copper rose on the hopes of tighter supply this year, aluminum fell moderating the gains from the previous week.
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Equities

FTSE 100 recouped weekly losses after the election result. With markets having braced themselves for chaos, the election results led to a relief rally when a majority government was formed. The MSCI China A-Share index fell 6.4%, moderating its gains after reaching a 7-year high the week prior. A disappointing Chinese manufacturing PMI reading and weaker trade figures deflated some of the optimism in the market. However, that disappointment let to interest rate cut effective today, which should provide the equity markets with a shot of adrenalin. Moreover, with further financial market liberalization on the cards for this year, we expect the domestic equity to undergo a period of secular expansion. This week, a number of Chinese data releases including industrial production and retail sales will help the central bank and investors assess the strength of the near-term growth.

Currencies

Euro downside risk as Greek tension mounts. The Euro has been one of the most volatile currencies this year and this week is unlikely to change that trend. We expect that this week’s Greek negotiations pose a downside threat, especially as the Euro remains elevated against the USD, despite last week’s strong jobs report in the US. We believe the soft patch in US economic activity will begin to fade and support a further rally in the USD. The British Pound was one of the strongest performing currencies last week, following the surprise Conservative majority victory in the general election. Investors will be looking ahead to the Bank of England meeting this week to gauge the central banks desire to hike rates. We expect that tighter policy is a long way off and that GBP/USD will gradually move back toward the levels it was trading at pre-election levels near 1.50.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

Important Information

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Oil Continues to Rally

ETF Securities Commodity ETP Weekly Oil Continues to Rally

Profit-taking drives US$58.1mn out of oil ETPs.

ETFS Daily Leveraged Nickel (LNIK) sees its highest weekly inflows since inception in 2008.

ETFS Daily Leveraged Tin (LTIM) had its second highest weekly flow since inception in 2008.

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With oil prices staging a premature recovery, many investors are taking profit. Global oil supply has not yet tightened, pointing to a geopolitical premium on oil prices accounting for the recent price gains. We believe there could be a correction in the short-term, but prices will continue to rise once supply starts to tighten. Tightening supply has also driven tin prices higher and we expect a similar trend across most industrial metals this year. Falling energy prices has not reduced production costs for metals sufficiently to restore profitability and supply cuts are the likely course for most metals.

Profit-taking drives US$58.1mn out of long oil ETPs. With Brent and WTI oil prices bouncing a further 1.4% and 1.8% respectively last week, more investors took profit on their positions. Last week was the third consecutive week of outflows as the price of Brent and WTI have gained 16% and 22% respectively over that period. Recent gains however appear excessive given the fundamentals. The positive reaction to a slower inventory build in the US two weeks ago was somewhat premature, given that last week inventories grew at a quicker pace than expected. All indications point to OPEC continuing to produce more oil, with March output from the cartel surging 810,000 barrels per day. Geopolitical risk has added a premium to the oil price, with Saudi Arabia’s attacks on Yemen, threatening to destabilize the Bab el-Mandeb Strait, a narrow chokepoint between the Horn of Africa and the Middle East. The strait is a transit point for 3.8 million barrels per day of oil, or 4% of global oil supply. Any easing of the instability in Yemen could see the premium dissipate relatively quickly. Moreover, Saudi Arabia could continue to increase the amount of oil it produces, which would pull down prices. In March it increased oil production by 660,000 barrels per day. A short-term correction in oil prices could once again open up an opportunity to go long oil for many investors ahead of the next OPEC meeting in June, where we expect talk of modest cuts to production to help prices increase once again.

ETFS Daily Leveraged Nickel (LNIK) sees its highest weekly inflows since inception in 2008. LNIK received US$2.2mn of inflows last week, following the International Nickel Study Group’s April meeting in Lisbon where it predicted that nickel usage will increase to 1.94Mt in 2015 from 1.87Mt in 2014. At the same time it forecasts production will decrease to 1.96Mt in 2015 from 1.99Mt in 2014, helping to tighten the supply surplus this year.

ETFS Daily Leveraged Tin (LTIM) had its second highest weekly flow since inception in 2008. Sharp price gains attracted US$1.6mn of inflows into LTIM. With Indonesia’s largest tin producer cutting output by as much as 50%, tin prices accelerated last week, gaining 3.4%. Tin prices had slumped by more 35% in the past year, increasing the urgency to cut back on production by the largest producing country.

Key events to watch this week. The Federal Open Market Committee will meet this week to decide on interest rates. This will be last meeting before June and will not be accompanied by a press conference. The market will therefore remain very attentive to FOMC member speeches and public engagements to glean any information about the possible path of rate increases this year.