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ETP: Trade view update – Short sugar, Target price US$0.165/lb

The sugarcane harvest in the South-Central region of Brazil (which produces 90% of Brazil’s sugar) has risen 12% above last year’s harvest since the start of the season1. We are likely to see a record harvest this year. Brazil accounts for 22% of global output…..


ETF Securities Research


– The sugar production season has not quite ended in Brazil, with only six mills reporting that they have finished crushing (compared to 24 this time last year and 97 the year before)2 . The extended season will see higher output of sugar.
– India, which started its harvest season in October, is likely to see its sugarcane harvest rise 7.6% above last year’s3  levels. India accounts for 15% of global production.
– However, there is a growing risk that Indian raw sugar production will fall short of last year’s production levels because a number of Indian mills are protesting against high State-mandated cane prices by stopping production. We believe that State Governments will eventually succumb to their requests to lower the price of cane (after all, what famers lose in price, they gain in volume).
– Since we put the short trade recommendation on the price has fallen 5% and net speculative longs still remain stretched. Our target remains US$0.165/lb.

Short Sugar Update

1. Source: UNICA (Brazilian Sugar Cane Industry Association)
2. Source: UNICA (Brazilian Sugar Cane Industry Association)
3. Based on a survey of 874 farmers across six Indian States conducted by SGS SA for Bloomberg

Source: ETFWorld.es

 

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.

  MA Weekly 07.10.13 1

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.

MA Weekly 07.10.13 2

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.

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