ETFS Multi-Asset Weekly – Global economic recovery in limbo
Highlights
Inventory build see oil prices sink again, as USD strength weighs on precious metals.
Chinese equities slump again, as mixed earnings see developed market equities trade choppy ranges.
FOMC in focus, more USD strength.
The global recovery rumbles onward, but the pace is slowing, weighing sentiment. Elevated volatility is a key feature across asset classes. The growth divergence between the US and other major economies will keep a firm bid under the US Dollar, with the FOMC meeting this week in focus. We expect the US is ready to raise rates in September, despite the market pricing in a November hike. Meanwhile, the Greek negotiations are extending, with logistical concerns likely to keep investors wary of being fully committed to European equities. With defensive assets beaten down recently, a surprise rebound is not to be ruled out.
Commodities
Inventory build see oil prices sink again, as USD strength weighs on precious metals. The U.S. Energy Information Administration reported another build in US oil stockpiles last week, prompting WTI crude prices to fall to the lowest level since end-March 2015. Meanwhile, the stronger USD is having an adverse affect across the commodities, space but precious metals, in particular, due to their strong monetary connection are being impacted more than others. However, tighter markets for platinum group metals should help stem the price declines. South Africa’s largest platinum miner Lonmin has announced closures to some of its mines, expecting to reduce production by 100,000 ounces of metal in 2015/16 – around 2% of total global mine production. The company indicated that at current price levels, the company is a loss making entity and cost minimization efforts are designed to turn the situation around.
Equities
Chinese equities slump again, as mixed earnings see developed market equities trade choppy ranges. Positive sentiment about Chinese intervention appeared to fade in early trading this week, with a sharp sell-off in Chinese equity benchmarks. Policymakers must tread a fine line between restoring confidence in local markets with domestic investors and convincing foreign investors of reforms that make markets more transparent and less susceptible to manipulation. We expect a relaxing of restrictions will be gradual but inevitably encourage more participation and greater stability. Q2 developed market earnings have been mixed, and combined with ongoing unease over Greek bailout discussions, European equity gains have faded over the past week. The discussions concerning the method of financing another Greek bailout are likely to be prolonged, and investors will remain on edge to see if depositors and/or bondholders need to take haircuts in the bailout process.
Currencies
FOMC in focus, more USD strength. We expect the Fed will continue to be balanced in its rhetoric and highlight the gains made in the jobs environment. There is an interesting divergence between market pricing and economic consensus on when the Fed will raise rate: the former is pricing a November hike, while economists expect a September tightening. Accordingly, we feel that as the market begins to price in a September hike, USD will benefit. The brief respite for commodity currencies is unlikely to last. With negative sentiment prevailing over fundamental conditions, we expect the recent rebound in commodity currencies is unlikely to last in the near-term. Weaker oil prices are weighing on CAD and NOK, while central bank rhetoric and negative China sentiment is pressuring AUD and NZD.
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ETF Securities Research team
ETF Securities (UK) Limited
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