Oil, Gold and Silver Rise on Fears of Iraqi Fallout. The Islamic State in Iraq and the Levant’s (ISIS) attack in northern Iraq has driven up safehaven demand for physical gold, which saw its first positive inflows in in four weeks. Crude oil inflows were at their highest since the peak of the Arab Spring in 2011. Investors are worried that the violence could spread further south and retaliation by Shia Muslims against the predominantly Sunni ISIS, could lead to an outright civil war. Cyclical commodities like copper also received support after the Federal Reserve reiterated that it is in no rush to raise interest rates. Rising global growth still remains the consensus view, but tail risks are rising with geopolitical events. Silver appears to be a clear beneficiary from this environment given its hybrid qualities.

Iraqi conflict drives US$53.8mn into crude oil ETPs. The Islamic State in Iraq and the Levant’s (ISIS) attack in northern Iraq is likely to derail the country’s plans to increase production of crude oil this year and it is unlikely that Saudi Arabia will be able to make up for the shortfall if the crisis spreads to the south. Brent crude rose 1.8% last week in response and could go higher if the violence spreads further south at a time when seasonal demand for crude remains high. Flows into ETFS Brent (OILB) were US$45.8mn, the highest since the peak of the Arab spring in 2011.

ETFS Physical Silver (PHAG) inflows rise to a three-month high. A 3.2% rise in silver prices helped drive US$25.2mn of inflows into PHAG. With its strong correlation to gold and wide industrial applications, investors are gradually becoming more optimistic on silver. Safehaven buying and short-covering amidst the Iraqi conflict has seen the price of gold and rise, pulling up silver in its wake. With global manufacturing activity rising, industrial demand for the metal is also looking more positive and another supply deficit this year would help tighten the market further.

ETFS Wheat (WEAT) inflows rise to a four-month high. Investors in wheat ETPs were attracted by bargain prices in contrast to the futures market investors where net speculative positioning has swung to net short from net long a month ago. Wheat prices have slumped to a four-month low on the back of upward revisions to global wheat supplies by the USDA. However, at the heart of the USDA’s forecasts are higher production figures from India and Australia which could be proved wrong if the delayed monsoon in India bites into yield. Also an El Niño event, with a 70% probability of starting this summer, which normally brings drought to countries like India and Australia, could damage crop prospects further. WEAT saw US$3.5mn of inflows last week as the price gained 1.4% on the back of India’s delayed monsoon news.

Rising copper prices lead to cut in short-positions. While the probe into fraudulent activity at the port of Quingdao had been weighing on prices in recent weeks, the FOMC meeting led to a copper rally on Wednesday and Thursday after emphasising it is in no rush to raise rates. We believe that prices could rise substantially to US$7500/MT from the current US$6736/MT as manufacturing activity (highlighted in today’s better-than-expected HSBC PMI reading) and fixed asset investment in China appear to have bottomed out and are growing faster.

Key events to watch this week

Investors will remain focused on the developments in Iraq in an otherwise quite data week. Consensus expects another cut to Q1 US GDP estimates, although developments in that quarter largely reflect the effects of adverse weather rather than an enduring downturn in activity. It may grab a lot of headlines but commodity prices are unlikely to be affected. The USDA’s quarterly hogs and pigs report out on Friday will garner interest after front month prices have risen close to 50% ytd.

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