ETP: Cyclical assets in favour as US suspends debt ceiling

Overview: Cyclical assets broadly rose after the US passed a bill to reopen the government and suspend the federal debt ceiling to 7 February 2014. With the Treasury now able to continue borrowing to fund expenditure, markets are more …

ETF Securities Research

optimistic that a global recovery will not be derailed. Adding to positive sentiment, Chinese Q3 GDP figures confirmed that growth picked up after a pause in the middle of the year. Counter-intuitively, gold staged its biggest one-day rise in a month following the agreement as shorts were covered and a weaker dollar helped drive the price higher. After a dearth of official data, the US non-farm payrolls numbers that will be released tomorrow will likely attract even more attention than usual. Markit PMI manufacturing readings for China and the US will be closely watched as investors assess the impact of the US budget and debt negotiations on global business sentiment. With Fed tapering likely put off until next year now and growth indicators in most key regions showing improvement, cyclical assets and global growth plays should remain in favour across asset classes.
Commodities: Industrial metals lead commodities higher. Buoyed by the suspension of the debt limit, industrial metals generally rose. Platinum and palladium, precious metals with wide industrial applications, both rose 2.5%, boosted by strong Chinese auto sales data. Another death of a union official close to Lonmin’s Marikana platinum mine provided a reminder of how union rivalry could hamper platinum and palladium production this year, adding further support to prices. WTI crude oil fell close to $101 a barrel on seasonal weaker refinery demand. Both WTI and Brent benchmarks dropped as there were signs of progress on Iran’s nuclear programme discussions in Gevena, which could eventually relieve sanctions on the country’s oil exports. A warehouse fire in Brazil led to a 1.5% weekly rise in the sugar price, as the sugar available for near-term delivery could be reduced.
Equities: Global equities rally as immediate risk of a US debt default is out of the way. At the final hour, the US government, yet again, suspended the debt ceiling, thereby avoiding a potentially catastrophic US debt default. Benefitting from stronger Euro, European equities have been leading the way with the FTSE 100® Leveraged Index and the FTSE® MIB Leveraged Index surging 4.5% and 3.8% respectively last week. The DAXglobal® Coal Index rallied 3.3% on better-than-expected quarterly results from coal miners such as Peabody, the largest US coal producer. The Russell 2000® index, which provides exposure to the small-cap segment of the US equity universe, also rallied 3.1% over the past week, outperforming the S&P 500 by 1 percentage point. The Russell 2000 index tends to outperform large cap benchmarks during periods of increasing appetite for risk.
Currencies: Chinese policymakers keep AUD, NZD supported. The Antipodean pair of the AUD and NZD were two of the best performing currencies last week, as seemingly perennially pessimistic analysts continue to revise expectations for Chinese activity higher. While the Australian and New Zealand central banks have tried talking their currencies lower, the commitment of Chinese policymakers to robust growth is likely to hamper these efforts in the short-term. While it has been surprisingly strong data from the UK on which the gains in Sterling have been based, the delayed US economic data and the resolution of the US debt impasse have played a part. The US side of the equation is likely to be a greater focus this week. Tomorrow’s US jobs data will be closely scrutinised, and if the delayed numbers are solid, the USD could reverse losses quickly.

Source: ETFWorld.es

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.
Commodities 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.
Equities 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.
Currencies 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.