ETFS Multi-Asset Weekly Geopolitical Risk Keeps Investors on Edge

Can oil’s rebound be sustained without geopolitical risk?

Goldminers outperform as investors await US earnings.

USD pares losses ahead of jobs data.

Geopolitical risk has again hit the headlines, after Saudi Arabia launched air strikes on Yemen, prompting investors to seek defensive portfolio hedges. Oil and gold have staged solid rallies, while rising volatility has left investors concerned over the sustainability of equity market gains. Investors will have one eye on the US earnings reports scheduled to begin this week, with the USD strength potentially posing a threat to corporate bottom lines. The other will be monitoring global developments including whether or not Greece can submit an agreeable set of reforms for creditors, while balancing its own citizens’ expectations.

Commodities

Can oil’s rebound be sustained without geopolitical risk? The rebel fighting in Yemen that drove a Saudi Arabian led Coalition to launch military action boosted WTI crude prices over 10% last week to their highest level in three weeks. However, if the action is able to quell the violent rebel uprising, we expect some near-term weakness as the market refocuses on abundant supply. We expect a bottoming process has begun in oil and medium term strength is likely. Elsewhere in the commodity complex, rising geopolitical risk also boosted precious metals prices, with silver being the largest beneficiary of the flight to defensive assets by investors. The rising risk environment will add to the current low/negative rate environment in enhancing the appeal of precious metals. The release of the WASDE crop conditions report is a key highlight for the agricultural sector this week. The report will give insight into the planting intentions of US farmers for grain crops and the health of the winter wheat crop, allowing investors to gauge the supply side strength compared to the record 2014 crop.

Equities

Goldminers outperform as investors await US earnings. While most major equity indexes struggled to make headway against rising volatility on the back of geopolitical concerns, goldmining companies remain an investor favourite. The DAXGlobal Gold Miners index continued to stage a rally, in line the rally of gold and has risen by nearly 12% over the past three months. Meanwhile investors continue to push Chinese equity valuations higher, seemingly more comfortable with a stabilising growth outlook, despite a weakening in the manufacturing indicators last week. The MSCI China A Index ended the week up nearly 3% at an all-time high. The focus for investors this week will be the beginning of the corporate earnings season in the US. With equity valuations retreating from recent record highs, investors will be looking for evidence of a softening in results and the impact of the stronger USD. If these conditions are realised we could see a pullback in equity performance.

Currencies

USD pares losses ahead of jobs data. Fed chair Yellen’s speech last week highlighted the gradual nature of the tightening cycle when it begins later in 2015. Nonetheless, the USD has taken back some of its recent losses despite weaker data and investors are looking ahead to jobs numbers which have been the one area of strength for the US. Certainly inflation is non-existent, and has reached zero not just in the US, but also for the first time in the UK. While revised Q4 GDP is expected to moderate, European investors will be more interested in the Eurozone CPI and unemployment readings, which are likely to reveal that the ECB still has much to do to help boost inflationary pressures via strengthening demand.

Important Information

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 (”FCA”).