The Federal Reserve refrained from raising rates last week, citing the rising risks around global growth. The US central bank appears to be outward looking compared to the last time it considered raising rates, a...
generation (9 years) ago. However, the lack of monetary tightening gave cyclical assets little cause for cheer as the market’s focus remained on the dovish sentiment around weakening global demand. China in particular is of concern, with the country targeting a lower rate of economic growth and struggling to stem the slide in its equity market. Little attention however is given to its recovering property market and its relatively robust imports of commodities like copper.
Investors turn to gold in times of uncertainty. Ahead of the US Federal meeting last Thursday, gold ETPs saw inflows of US$40.9mn over the past week. While the decision to keep interest rates unchanged was generally expected in the futures market, economists were spilt in their forecasts in the week leading to the decision. Gold gained close to 2.15% on Friday, while the US dollar fell 0.6% after the FOMC meeting and end of Friday. Looser monetary policy is seen as currency debasing by some and gold as a hard, defensive asset stands to benefit. Gold ETPs have seen inflows nearly every week since mid-August when gold price broke down the US$1,100/oz. level for the first time as investors have been attracted to the relatively cheap hedge asset. Last week saw the highest inflows into gold ETPs in four weeks and many benefited from the close to 3% return over two days last week. If the current price momentum in gold continues, we are likely to see further inflows into the safe-haven asset in the near term.
Investors move into selective broad basket ETPs. Last week saw net inflows into precious metal, industrial metal and energy broad baskets ETPs. Many investors are rediscovering the diversification benefit of adding commodity baskets to their portfolios in light of their low correlation to other assets. The diversification benefit of a basket is greater than the diversification benefit of a single commodity. Energy broad basket ETPs saw their largest ever net inflows of US$25.2mn. Investors have been attracted to the bargain prices in energy commodities. Total net inflows into energy ETPs now stand at US$117bn since the price of oil fell below US$50/bbl. at the beginning of the year. Industrial metal broad basket and precious metal broad basket ETPs also saw inflows of US$14.3mn and US$9.8mn respectively, suggesting that market sentiment is slowly reversing after seeing outflows for most of this year.
Net inflows into short copper ETPs. After a short rebound, most industrial metals recorded losses again last week, partially offsetting the previous gains. Zinc and nickel were the worst performers, down 5.5% and 4.4% respectively. The severe earthquake in Chile during the night between Wednesday and Thursday temporary boosted the price of copper above US$5,400/ton. ETP investors, expecting the gains to be temporary, chose to short the red metal with US$8.1mn of inflows into ETFS Copper short copper (SCOP), the largest since March 2014.
Key events to watch this week. Existing home sales and durable goods orders from the US are expected to be lower this month than last, underscoring some of the loss in momentum that global risks present. US consumer confidence measured by the University of Michigan, on the other hand, is expected to improve.