Commodity rally drives a mixture of profit-taking and position building

ETF Securities Weekly Flows Analysis – Commodity rally drives a mixture of profit-taking and position building

• Crude oil, industrial metal and gold ETPs see inflows as the price rally draws in investors.
• Palladium ETPs see profit taking after a very strong rally.
• Inflows into short European equity ETPs the highest since July 2016.

First inflows into crude oil ETPs since November 2016 as investors encouraged by Saudi Arabia adhering to quota. There were US$44.2mn of inflows into long crude oil ETPs last week as oil prices regained losses earlier in the week. Statements by the Saudi Arabian Energy Minister al-Falih indicate that the country has cut production by more than necessary to meet its quota and could reduce production further next month. However, we caution that domestic consumption falls in the winter and so the level of exports from Saudi Arabia may remain the same. With WTI oil price above US$50/bbl since the beginning of December 2016, both production and exports in the US have surged. US production of oil was 2.9% higher in the first week of January compared to the first week of December.

Gold ETPs see third consecutive week of inflows. Inflows of US$22.3mn indicate that investors are combining their bullish cyclical positions with strategic hedges. Despite the equity and cyclical commodity rally in the first two weeks of the year, there is reason for investors to remain cautious. The ‘Trump Rally’ could be fleeting. Although many of the President Elect’s policies appear pro-growth, there is little detail on how they will be implemented. The risk of disappointment is high. The US Dollar (DXY) has lost about 2% while gold has gained close to 5% year-to-date as the vagueness of Trump’s policies has unsettled some investors.

Profit taking in palladium ETPs see an outflow of US$117.7mn. Palladium has had a very strong start to the year – gaining close to 11% – which has erased most of the losses the metal sustained in December. Johnson Matthey expect mine supplies to remain flat this year while demand – primarily from the auto sector – will grow. As a result palladium will likely be in the sixth consecutive year of a supply deficit.

Industrial metals rally drives largest inflow into broad metal baskets since November 2016. A combination of a weaker US dollar (in which most commodities are priced) and strong Chinese commodity import data led metal prices to continue to rally last week. Investors bought US$23.3mn of industrial metal basket ETPs and a further US$10mn in individual industrial metal ETPs last week. The market has largely brushed off the lack of detail behind Trump’s infrastructure spending plans and the relaxation of some of Indonesia’s ore export ban.

Investors increase positions in short European equities by the most since September 2015. Inflows of US$5.0mn into short DAX ETPs and US$7.8mn into short FTSE100 ETPs shows that some investors are increasing contrarian positions following the strong equity rally. Meanwhile, the growing relevance of automation in a world where demographic aging and access to low cost migrant workers could become more difficult has led to rising investor interest in robotic equities. Last week’s inflows of US$10.2mn was the highest since October and marks the 18th consecutive week of inflows in ETFs capturing this theme.

Video Presentation

Nitesh Shah, Director, Commodity Research at ETF Securities provides an analysis of last week’s performance, flow and trading activity in commodity exchange traded products and a look at the week ahead.

For more information contact

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

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