Overview: Precious metals, particularly gold and silver, were hit hard last week as investors continued to re-assess the outlook for US monetary policy. The sharp rise in US real interest rates has been the main trigger for the correction in gold and silver prices. In our view, the reaction of bond markets to Fed comments has been overdone, and ultimately real interest rates will fall back from current levels. It appears that the Fed agrees that bond markets have over-reacted, and key FOMC members now appear to be trying to talk rates back down. We also believe that markets are also over-reacting to the recent squeeze in China short-term liquidity. We believe this is a short term policy to signal to smaller financial institutions to toe the line on government directives on limiting real estate lending. We expect China liquidity conditions will ease and growth fears will dissipate over the course of the year, removing this hindrance to China-sensitive assets, including some of the more cyclical commodities, currencies and equities…….
ETF Securities Research
Commodities:Cyclical commodity sell-off overdone as markets misread China liquidity signals and the Fed. Despite the broad-based risk-asset sell-off, coffee and sugar prices rose on fears that heavy rainfall in Brazil could damage the harvest and reduce the yield. The copper price fell on news that Indonesia’s Grasberg copper mine, the world’s second largest, has recommenced production after a safety inspection. The palladium price slumped 4% on China fears despite continued supply side problems in South Africa. The gold price fell to the lowest level in nearly 3 years last week, to $1192/oz, a level last reached in August 2010. In our view the sell-off has been excessive as bond markets have over-reacted to Fed comments on QE retraction.
Equities:Leveraged equity ETPs surge on reversal of previous week’s sell-off. The FTSE 100® Leveraged Index was up 2.7% despite UK Q1 GDP being revised down from 0.6% y-o-y to 0.3% y-o-y. The LevDAX® x2 Index also saw a positive 1.4% return while the Russell 2000® Index was up 2.1% last week, reversing the previous week’s large sell-off following the Fed’s indication that it might start to taper QE later this year. The Dow Jones Global Select Dividend Index, which provides investors with exposure to the top dividend-paying companies globally was up 1% last week. China concerns, however, hit mining companies, pushing to the DAXglobal® Coal Index down 3.7% and the DAXglobal® Gold Miners Index down a severe 7.5%. Once sentiment towards gold and to China reverses these funds should rebound in our view.
Currencies:AUD and NZD rebound, reflecting market view there has been an over-reaction to China short-term liquidity squeeze. Risk appetite returned to the FX market, boosting performance of the currencies that have been battered the most in recent weeks, namely the AUD and NZD. In our view the AUD and NZD should continue to rebound this week as China continues to ease liquidity conditions. Meanwhile, the uncertain outlook for central bank policy saw a decidedly mixed performance for the US dollar last week. Rising US yields are lifting the US Dollar against the Euro and the Pound with investors continuing to be polarized on the outlook for monetary policy after recent Fed comments. In the absence of more significant comments from Fed officials, performance is likely to be limited ahead of US payrolls. Jobs data on Friday will be key and with USD volatility remaining elevated. Expect a strong USD rally if jobs surprise on the upside.
Source: ETFWorld – ETFSecurities