ETF Securities Commodity ETP Weekly: Weak Chinese PMIs trigger global panic and market sell-off

Weak Chinese Manufacturing and Service PMIs triggered a market sell-off early last week affecting stocks and commodities with oil falling to an 11-year low while gold rose more than 4%…..

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– Oil ETPs saw inflows last week, adding to last year’s strong inflows. Oil ETPs attracted the largest inflows across commodity complex last year after oil prices dropped 33% in 2015 and drove bargain-hunting.

– Gold and broad commodity ETPs also recorded inflows as investors rebalanced their exposure out of equities and into safe haven assets such as gold.

Lower oil prices drive further inflows into oil ETPs. Oil prices fell to an 11-year low after Chinese Caixin Manufacturing and Service PMIs released last Monday renewed pessimism about China’s growth prospects and demand for natural resources this year. Last week, Brent fell to US$33.75/bbl (-9.5%) and WTI fell to US$33.27/bbl (-10.2%). Tensions between Saudi Arabia and Iran underpinned oil prices very briefly on Monday but was soon overcome by the rout in global equity markets. The decline in US oil inventories last week seemed to have gone completely unnoticed, with the market focused on the broader cyclical sell-off. Despite last week’s inventory decline, US oil stocks remain significantly above its historical average and the global supply glut in oil continues to weigh on prices. However, the prospect of a price recovery in the medium term remains the general consensus. Oil ETPs recorded inflows of US$43mn last week after a year of strong inflows of US$1.46bn, the largest across ETF Securities commodity ETPs.

Global stock market sell-off benefitted gold. Gold maintained its safe-haven status in the opening week of 2016. Chinese stock exchanges were forced to halt trading several times over the past week, triggering a more general panic across global asset markets. The panic led to gold prices rising 4.4% and gold ETPs witnessed net inflows of US$11.1mn, the largest inflows since mid-November. Last year gold ETPs recorded outflows of US$1.26bn, the largest across the commodity complex, as a strong US dollar and rate rises weighed on the price of the metal. By Friday, gold prices eventually pared back some of its gains on the hopes that the suspension of China’s circuit breaker rules would calm the market. Strong US non-farm payroll released on Friday may also add further downward pressure to the yellow metal this week.

2016 a turning point for commodities? While commodities will remain affected by the excessively negative sentiment around China, we believe USD strength will wane this year, removing one of the weights on commodity prices with gold the main beneficiary. Oil should progressively recover as weak prices become economically unsustainable for the OPEC countries. Mining capex and production cuts should bite into supply, providing an upward pressure to some metal prices. Last week saw inflows of US$18.9mn into broad commodity ETPs, marking the third consecutive week of inflows into broad baskets. Broad commodity baskets saw a total of US$232.2mn inflows in 2015.

Key events to watch this week. The Bank of England (BoE) meeting on Thursday will reveal whether the BoE will follow the Fed and increase interest rates. Historically the BoE has increased rates 6 months on average after the Fed. Commodity prices are likely to remain volatile, especially after the release of Wednesdays’ Chinese trade data.



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