Commodity ETP Weekly: Upswing in cyclical indicators boosts energy and industrial metals


Overview: Cyclical commodity prices lifted last week, following signs that the global economic recovery is gaining pace. PMIs indicating that the manufacturing sector is expanding in the US, China and Europe boosted industrial metal and energy prices. The US…


    ETF Securities Research

    economy demonstrated that it is on a firm footing with GDP growth of 1.7% annualised in Q2, far better than consensus estimates. Despite some disappointment over the US nonfarm payrolls in July, the jobs market remains robust. Further positive news from China this week should ease concern about a ‘hard landing’ for the economy and reinforce the bullish momentum for cyclical commodity prices. Last week’s central bank meetings (the US Federal Reserve, European Central Bank and Bank of England) showed continued commitment to keep liquidity conditions accommodative, while resisting the temptation to restrict expansionary policy too soon. The lower perceived need to insure against tail-risks has kept downward pressure on the precious metals sector, prompting further reduction in gold ETP holdings. However, investors are beginning to accumulate positions in silver, with technical indicators pointing to a potential rally.

    ETFS Zinc (ZINC) receives record inflows, totalling US$14mn, on expectations of mine capacity closures.

    The Zinc price has fallen by over 10% since the beginning of the year on weak global demand. Although the zinc market is expected to be in a surplus in 2013, the recent drop in the silver price could trigger production cuts. Silver is the biggest by-product of zinc production and a persistently weak silver price may further reduce the output of zinc. At the same time, persistent oversupply concerns drove US$16mn of outflows from ETFS Nickel (NICK) last week.

    Silver ETPs see highest inflows since April price crash as technical indicators signal potential upside.

    Weekly inflows of US$10.7mn into silver ETPs mark a break from the gloom surrounding the metal since April when prices dropped 15%. Widely observed technical indicators could be signalling that pessimism has gone too far – the gold:silver ratio reached a 3-yr high and the silver put:call ratio hit the lowest level in 10 months – and has potential upside. Meanwhile, gold continues to fall out of favour as investors’ perception of tail-risks diminishes. Another week of bullish data combined with assurances from the Fed that it will not taper abruptly has assuaged market concerns about tail-risks.

    Cyclical upswing fosters interest in industrial metals.

    ETFS Longer Dated Industrial Metals (FIND) attracted US$7.7mn last week, the largest inflows since December 2012, highlighting renewed optimism in the global manufacturing environment. The price of tin rose 8.2% last week on the back of tightening export standards in Indonesia. Tighter market conditions could help lift prices and attract flows into tin ETPs.

    ETFS Daily Leveraged Natural Gas (LNGA) inflows surge as profit taking hits crude ETPs.

    LNGA inflows hit a 1½-year high, totalling US$23.9mn, the highest since February 2012. Meanwhile, investors took advantage of rising crude prices to reduce positions for the third consecutive week. Strength in the US recovery will help absorb the glut of oil and gas that has weighed on price performance in the recent months. US natural gas inventories are now below their 5-year average, while US crude inventories hover near their 2013 lows, fuelling the optimistic outlook for the energy sector.

    Profit taking prompts US$19.6mn outflows from ETFS Physical Platinum (PHPT).

    Palladium is the second best performing commodity over the past month, behind gasoline. Further escalation of violence between rival South African unions is putting PGM production at risk. Flows should reverse as unrest remains a constant production threat and investors reassess the extent of the problem..

    Arabica coffee attracts bargain hunters.

    After falling 7.4% last week, Arabica coffee ETPs saw US$3.5mn of inflows, the highest level in over two months. Coffee roasters are likely to take advantage of lower prices, increasing the amount of Arabica in their blends.

    Key events to watch this week.

    Focus will fall on industrial production data from China as investors gauge whether the economy is slowing as much as investors fear. Trade figures from the US, China and Germany will also give cues to the strength of the global recovery.


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