Overview: The gold price rebounded at the end of last week as the risks of a temporary US government shutdown rose sharply on continued lack of progress in negotiations between Congressional Republicans and…
ETF Securities Research
Democrats. The gold price and US dollar weakness have been given further impetus due to lack of further progress over the weekend. The extreme division between the two groups also raises the risk that policy mistakes lead to a possible US debt default as soon as next month if the parties cannot come to a compromise and raise the US government debt ceiling. In this highly uncertain environment the US dollar is likely to remain under pressure and gold and other perceived safe havens well bid. Ultimately, however, we believe these issues will be resolved. Therefore for investors with a medium-term time horizon we continue to expect more cyclical assets such as industrial metals and equities to outperform, supported by improving global industrial demand and continued easy money.
Commodities: US political uncertainty led to a knee-jerk sell-off of cyclical assets, but several agricultural commodities bucked the trend. Wheat prices rose last week ahead of the USDA’s inventory report due today. Sugar prices also rose despite favourable harvest conditions in India, as investors were more concerned about colder weather in Brazil. Silver was the worst performing metal. However, silver’s hybrid nature makes it potentially interesting now. With around 50% of silver demand derived from the industrial sector, silver should benefit if the global industrial cycle continues to improve. At the same time, its relatively high correlation to gold and due to its historical use as an alternative “hard currency” means that ultimately it should benefit if sovereign debt and currency debasement concerns continue to rise.
Equities: Equities fall as US fiscal and debt risks continue to rise. Global equities fell last week as the deadline to raise the US debt ceiling is within the next few weeks, bringing sovereign debt issues back into the headlines. The growing risk of a partial shutdown of the US government has weighed on equities with short equity ETFs rallying between 0.6 to 1.7% last week. Continued uncertainty about the likelihood and potential implications of a US government shutdown and prolonged fight over raising the US debt ceiling will likely keep equity markets in thrall in the coming weeks. Further out however, as these issues are resolved (or at least postponed again), markets are likely to focus back on improving global growth prospects and continued high liquidity, pushing more cyclical equities such as the Russell 2000 higher.
Currencies: Norwegian Krone falls as British Pound hits 9 month high. Falling oil prices took a toll on the Norwegian Krone as it depreciated against major currencies. While the operations of the Government Pension Fund cap the volatility in the currency, the Krone still remains highly sensitive to oil prices. In contrast, the strong run of the British pound against the USD continued last week, as growth data remains strong and the Bank of England Governor said last week that the strength of the economy indicates no immediate need for further quantitative easing. In our view the rally is starting to look stretched. If growth data stop surprising to the upside and the Fed moves ahead with tapering, we believe the GBP remains one of the more vulnerable of the G10 currencies.
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