News from China’s Third Plenum meeting was viewed positively by markets, with an increasing emphasis on private sector-led growth, a loosening of the one-child ..
ETF Securities Research
policy, encouragement of rural land rights reform and other legal changes to boost urbanisation, and policies to reduce overcapacity in key sectors (including commodity production) helping to drive a rally in local markets. At the same time, comments from likely future Fed Chairman Janet Yellen, together with poor euro-area GDP growth numbers and weak inflation, indicate that central banks may keep the taps open longer than many investors are expecting. Yellen’s speech took some of the steam out of US bond showing healthy growth and central banks biased towards maintaining highly expansionary monetary policy, cyclical assets are likely to remain supported as we move into the new year. We remain bullish small cap and basic resources equities, metals such as platinum, palladium and copper and maintain our bullish view towards the US dollar vs the Euro.
Commodities: Brent oil rallying on growing Libya supply concerns. Brent oil prices moved higher last week as on-going supply problems in Libya, driven by protests and strikes, are expected to have reduced oil output to a fraction of its pre-crisis (February 2011) level of 1.65mn barrels per day. It is unlikely this situation will reverse, and we expect it will continue to support the Brent oil price in the near term. The poor Q3 2013 GDP reading from the euro-area added weight on metals prices, with silver posting the largest loss last week, followed by copper, nickel and palladium. It is interesting to note that silver failed to receive the same support gold received following Yellen’s dovish comments, indicating investors are focusing more on silver’s industrial than store of value characteristics at the moment. Sugar fell 2.2% as the Indian cane harvest gained traction. We believe sugar has further to fall given our expectations of supply increases and extended long futures positioning.
Equities: Small caps continue to benefit from dovish central bank expectations. Last week saw rising appetite for risk benefitting US equities, with the Russell 2000® Index rallying 3%. European equities on the other hand show mixed performance last week. A two-tier Eurozone seems to be emerging as poor GDP growth numbers and weak inflation combined with concerns that France may follow the path of Italy and Spain after losing its AA+ rating hit major European benchmarks with the exception of Germany. The LevDAX® x2 Index was up 1.4% while the FTSE 100® Leveraged Index and the FTSE® MIB Leveraged Index lost 0.7% and 1.2% over the past week. More aggressive monetary policy from the ECB should provide more stability to the Eurozone and support the equity rally into 2014 in our view.
Currencies: GBP resilience to be tested ahead of release of BoE and Fed minutes this week. The Bank of England has been the one central bank to buck the general trend towards indicating an “easier for longer” policy, increasing its growth forecasts last week. We feel that most of the good growth news is priced in and any signs of weakness or dovish comments from the Bank of England minutes may catalyse the GBP/USD to break convincingly below its 50 dma. Comments from Norwegian officials indicating the need for a weaker Krone to support exports combined with expectations that the Swedish Riksbank will cut rates at its next meeting will likely keep the both Scandinavian currencies under downward pressure.