ETP: China bullishness and central bank dovishness support extended risk asset rally


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

MA 18.11.13 1policy, 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.

MA 18.11.13 2Commodities: 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.

MA 18.11.13 3Equities: 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.


Investors have been shrugging off the first shutdown of the US Federal Government in seventeen years, with most asset classes and gold seeing relatively limited reaction. The calm is unlikely to last long in our view. Toward the end of last week there were tentative signs of increasing market impatience with the lack of progress, including continued selling of the US dollar and buying of perceived safe haven currencies such as the Japanese yen and Swiss franc. The cavalier attitude being taken by politicians about fiscal matters is leading to growing doubts about the ability of US politicians to come to a compromise that will avoid a sovereign default. With the debt limit likely to be breached around 17th October (unless extended), markets are likely to remain volatile and short term news driven over the next few weeks. In the meantime, some investors are taking the opportunity to increase positions in beaten down cyclicals. But if progress on debt negotiations maintains the current stalemate much longer, gold is likely to move back into the spotlight.


Although gold often gains during extreme events, the start of the first US Federal shutdown in seventeen years last week failed to lift the gold price. Investors appear to be looking through the storm and are focused on assets that will either benefit from the continuation of the global growth recovery or are generally uncorrelated with debt risk.  Cotton and sugar gained 2.3% and 1.8% last week, bouncing from lows hit in September, but without strong news driving the trend. Platinum and palladium fell 3.6% and 2.5% respectively. That comes despite a 17% rise in Japanese auto sales (to a 14-month high) and a 12.1% rise in UK car sales (to a five-year high). US car sales also remained brisk, despite the timing of Labor Day distorting the monthly statistics. Autocatalyts are the primary source of demand for the platinum group metals (PGMs). The strike that started two weeks ago was still on-going last week at Amplats, constraining the supply of PGMs.

    MA Weekly 07.10.13 1


US equities remain under pressure as the negotiations over raising the US debt ceiling continue. The S&P 500 fell for the second consecutive week as Republicans and Democrats continued to fight over the budget and debt ceiling. European equities have also been sensitive to the political turmoil in the US. The Euro Stoxx 50® Investable Volatility Index, which provides exposure to the forward implied volatility of the Euro Stoxx 50® Index, surged 5% last week, followed by the FTSE® MIB Super Short Strategy Index and the ShortDAX® x2 Index, up 3.5% and 1.4% respectively. Global equities are likely to remain volatile and under pressure as we get closer to the estimated 17 October hard deadline for lifting the debt ceilding.

MA Weekly 07.10.13 2


Safe haven currencies benefit as US fiscal negotiations drag on. The Japanese Yen (JPY) was the best performing G10 currency last week as investors sold risky assets and paid back JPY loans on growing concern about the lack of progress on US fiscal and debt negotiations.  For similar reasons the Swiss Franc (CHF) and even the Euro (EUR) also rallied against the US dollar last week. The British Pound (GBP) held up, continuing the trend of the past three months. However, towards the end of the week the currency showed some weakness, indicating the rally may be peaking. In our view, the GBP is one of the more overvalued G10 currencies and – despite recent rhetoric – has one of the more dovish central banks. We therefore believe the currency is particularly vulnerable to a sharp drop once growth data stop surprising to the upside.

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