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Commodity volatility expected

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ETF Securities Commodities Research: Commodity volatility expected as China liberalises financial markets

ETF Securities Commodities Research: Commodity volatility expected as China liberalises financial markets

Commodity volatility expected as China liberalises financial markets

Summary

China is both one of the largest producers and consumers of most commodities. Yet financial centres in the UK and US are responsible for setting global prices for many commodities.

China seeks to expand its role in the intermediation and price setting of global commodities. However a key hurdle is currency restrictions and capitals controls.

While timing of any currency and capital market reform is unclear, dismantling these restrictions could unwind large carry-trades that use commodities as collateral, introducing a new source of volatility to the asset class.

China and commodity demand

China’s role in the upward phase of the commodity supercycle remains largely undisputed: resource-intensive economic growth, led by urbanisation, industrialisation, and a growth in global trade between the mid-1990s and the financial crisis in 2008 drove demand for commodities higher. With supply unable to keep up with demand, prices rose substantially higher. Although more volatile, commodities prices have a fairly strong correlation to China’s GDP growth.

China’s commodity futures markets

Futures markets are an integral part of the global financial market infrastructure, as they allow both consumers and producers of commodities to hedge. Hedgers are typically on the short side of futures markets and thus need to offer positive risk premia to attract speculators on the long side.i By bringing a large number of financial investors to the long side, financialisation of commodities mitigates this hedging pressure and improves risk sharing.

Although China is the largest consumer of commodities, its development of a futures market in commodities only took place after the onset of the commodity supercycle (and many commodities have been added in the downward phase of the cycle). The Shanghai Futures Exchange (SHFE) started trading copper and aluminium in 1999 and added zinc (2007), gold (2008), nickel (2014).
The volume of gold and copper traded on the SHFE has been rising, highlighting the traction that the market for these metals has been gaining in China.

Global ambitions require currency policy change

China seeks to play a larger role in the intermediation of commodities internationally. It recognises it is the largest consumer and producer of many commodities, yet relies on financial centres outside of China for the setting of prices. Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said at the SHFE’s annual conference in May 2016 “We’re facing a chance of a lifetime to become a global pricing center for commodities”. Due to currency restrictions, trading in raw materials is largely off-limits to overseas investors. However, that is an issue that China has long pledged to change. Any change in currency policy will likely be a strong catalyst for the growth of China’s commodity futures market.

Distortions in Chinese commodities…

Closed capital markets and currency restrictions have led to some unusual practices in China. China’s interest rate is higher than many other countries (especially developed market interest rates which in some cases are below zero). If Chinese investors were able to borrow in foreign currencies they could engage in a typical carry trade and arbitrage from the rate differential (subject to currency market moves). However, capital restrictions which stop domestic investors accessing foreign loans and exchange rate management violate the so called ‘covered interest rate parity’.

However a loophole exists. In order to make Chinese manufacturers more profitable, the authorities allow them to use work in process inventory such as copper, tin, aluminium (or even finished inventory) as collateral for loans. A manufacturer can go to a local bank and ask to borrow in US dollars or euros or yen etc. at low interest rates using commodity as collateral. The funds will be delivered to the manufacturer in Yuan and can be deposited at high interest rates. The local bank would verify to the People’s Bank of China (PBoC, the central bank) that the collateral is sitting in a warehouse (i.e. is bonded) and the PBoC will use an offshore entity to borrow the funds (which it will then pass to the local bank).The existence of the facility could be artificially inflating demand for commodity imports into China.

The risk with opening up currency markets therefore is that this carry trade could fall away and unlock a substantial amount of commodities tied up in bonded warehouses to industrial usage.

It is estimated that in 2014 about US$109 billion foreign exchange loans in China were backed by commodities as collateral, equivalent to 31% of China’s short-term FX loans and 14% of China’s total FX loans.ii In 2014, China imported US$1.7 trillion of commodities. The estimated amount of financing therefore represents about 6% of imports. In the worst case scenario if all those commodities were to unwind (a scenario we don’t believe will occur), there could be a 6% supply shock, which would be price negative. A collateral unwind of a smaller magnitude, we believe will still lead to commodity price volatility.

Copper is probably most at risk. Close to half of current copper demand in China could be from the copper carry trade.

…including gold

A similar trade exists in gold. Imported gold is being used via gold loans and letters of credit to raise low cost funds for business investment and speculation. Financial liberalisation could also see these trades unwind.
In 1950 China had prohibited private ownership of bullion and put the gold industry under state control. With the creation of the Shanghai Gold Exchange (SGE) in 2002, formal prohibition on gold bullion was lifted in 2004. China has embraced this relatively new opportunity to own gold, with the country overtaking India as the largest consumer gold coins and bars. Despite the cultural affinity to buy and store gold, those stocks can be monetised. Gold leasing i.e. the ability for banks to loan out gold has seen rapid growth. Gold can also be used as collateral for borrowing from banks as long as it meets the SGE criteria. Once again this collateral-based lending could fall away if access to unsecured loans is improved.

ETFS4

We expect any movement to a freer currency and open capital markets to be gradual. But that transition could introduce volatility to global commodity prices as collateral carry trades in China unwind.

i Keynes (1923), Hicks (1939), Hirshleiffer (1988)
ii “Commodities as Collateral” in forthcoming Review of Financial Studies by Ke Tang (Tsingua University) and Haoxiang Zhu (MIT Sloan School of Management), April 2016

Important Information

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This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

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April in ETFs: Gold at New Highs, Crypto in Transition, and Moat Index Holding Steady

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As April winds down, markets remain on edge, with escalating tariffs and renewed trade tensions keeping volatility in focus. In this summary of our full-length newsletter, we spotlight gold and gold equities, both of which have surged to record levels. We also take a step back from the day-to-day noise in crypto to explore the broader shifts in the regulatory landscape in our latest Whitepaper and present Celestia in detail. Finally, we assess how Moat indexes have held up and evolved amid the turbulence.

As April winds down, markets remain on edge, with escalating tariffs and renewed trade tensions keeping volatility in focus. In this summary of our full-length newsletter, we spotlight gold and gold equities, both of which have surged to record levels. We also take a step back from the day-to-day noise in crypto to explore the broader shifts in the regulatory landscape in our latest Whitepaper and present Celestia in detail. Finally, we assess how Moat indexes have held up and evolved amid the turbulence.

Your VanEck Europe team wishes you a great read.


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Gold & Gold mining equities tend to shine during stress periods

Source: VanEck, World Gold Council.

Gold has attracted renewed interest from investors amid concerns about inflation, currency volatility, and overall market uncertainty. Gold mining companies have recently reported improved profit margins and cash generation, with some initiating share buybacks and maintaining relatively strong balance sheets. Despite these developments, many continue to trade below their historical valuation averages.

While historical trends indicate that gold and gold mining equities have outperformed during certain periods of market stress, these patterns may not repeat under different economic conditions. Performance can be influenced by a range of factors including interest rates, central bank policy, geopolitical developments, and investor sentiment.

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Cryptocurrencies are entering a new era. With the re-election of Donald Trump and the implementation of the European Union’s Markets in Crypto-Assets (MiCA) regulation, digital assets are moving into a landscape defined not just by innovation, but also by regulatory clarity.

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U.S. equity markets experienced significant declines during the month of March. Meanwhile, spot gold price recorded new all-time highs, surpassing the $3,000 per ounce mark on 14 March and closing at a record price of $3123.57 on March 31, a 9.30% ($265.73) monthly gain. As of 31 March, gold prices have risen by 93.61% over the past five years (1). Investors should keep in mind that past performance is not representative of future results.

The gold miners, as represented by the NYSE Arca Gold Miners Index (GDMNTR), outperformed significantly, up 15.51% during March (2). This gain reflects both their operational leverage to rising gold prices and market perceptions of relative value. However, gold miners can also be subject to heightened volatility, operational risks, and sensitivity to commodity price swings.

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At the same time, the SMID Moat Index lagged small and mid-caps in March. Smaller U.S. stocks were also impacted by global trade tensions and economic growth concerns with the broad small- and mid-cap benchmarks falling during the month. However, year-to-date, the SMID Moat Index remains ahead of the broader small- and mid-cap markets.

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(1) Source: World Gold Council, ICE Data Services, FactSet Research Systems Inc.

(2) Source: Financial Times.

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BBVAE ETF är en spansk ETF som spårar Eurostoxx 50

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BBVA Acción Eurostoxx 50 ETF FI Cotizado Armonizado (BBVAE ETF) med ISIN ES0105321030, strävar efter att spåra EURO STOXX® 50-index. EURO STOXX® 50-indexet följer de 50 största företagen i euroområdet.

BBVA Acción Eurostoxx 50 ETF FI Cotizado Armonizado (BBVAE ETF) med ISIN ES0105321030, strävar efter att spåra EURO STOXX® 50-index. EURO STOXX® 50-indexet följer de 50 största företagen i euroområdet.

Den börshandlade fondens TER (total cost ratio) uppgår till 0,20 % p.a. ETFen replikerar resultatet av det underliggande indexet genom full replikering (köper alla indexbeståndsdelar). Utdelningarna i ETFen delas ut till investerarna (halvårsvis).

BBVA Acción Eurostoxx 50 ETF FI Cotizado Armonizado har tillgångar på 133 miljoner euro under förvaltning. Denna ETF lanserades den 3 oktober 2006 och har sin hemvist i Spanien.

Beskrivning BBVA Acción Eurostoxx 50 ETF FI Cotizado Armonizado

Med BBVA Acción Eurostoxx 50 ETF FI Cotizado Armonizado deltar investerare i ökningen av värdet på aktierna i de 50 största konglomeraten i euroområdet (euroområdet). Euro Stoxx 50-indexet inkluderar aktier från 8 länder i euroområdet: Belgien, Finland, Frankrike, Tyskland, Irland, Italien, Nederländerna och Spanien.

Handla BBVAE ETF

BBVA Acción Eurostoxx 50 ETF FI Cotizado Armonizado (BBVAE ETF) är en börshandlad fond (ETF) som handlas på Bolsa de Madrid.

Bolsa de Madrid är en marknad som få svenska banker och nätmäklare erbjuder access till, men DEGIRO gör det.

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BörsValutaKortnamn
Bolsa de MadridEURBBVAE

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SAP SEDE00071646005,16%
TotalEnergies SEFR00001202714,59%
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Schneider Electric SEFR00001219723,46%
Future on Euro Stoxx 503,02%
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L’Oreal SAFR00001203212,98%
Allianz SEDE00084040052,93%

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The Art of Meme-ing: How Dogecoin Redefined Value

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Explore Dogecoin's impact on crypto, turning internet memes into cultural and financial assets.

Explore Dogecoin’s impact on crypto, turning internet memes into cultural and financial assets.

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00:27 – Where do Memes come from?

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10:28 – Do these things have value?

14:04 – The different types of cryptocurrencies

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30:38 – Final thoughts

Research Newsletter

Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com

Disclaimer

The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.

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