ETF Securities – Investors appear to shrug off trade-war risk for now

Highlights

• Inflows into industrial metal baskets of US$9mn highlights cyclical optimism as investors appear to shrug off threats of a trade-war.
• Gold ETPs attracted USD14.5mn, marking the first substantial inflow in six weeks.
• Cocoa rally sparks profit taking

Inflows into industrial metal baskets of US$9mn highlights cyclical optimism as investors appear to shrug off threats of a trade-war. Although base metal prices fell last week after the Trump Administration applied tariffs to imports of steel and aluminium in the US, many ETP investors shrugged off the event. The tariffs could tighten the supply of metal coming from China. As a serial overproducer, cutbacks from China would be welcome news and could even increase prices; China is already trying to reduce capacity in steel and aluminium and this should push the country further along in its efforts. The impact on the broader commodity complex will largely depend on the reaction from other countries. If a tit-for-tat trade war breaks out, we could see international trade decline and it could be the beginning of a downturn in economic prosperity for many countries, which could hurt cyclically exposed assets. The softening of rhetoric from the US by the end of the week could mean that other countries refrain from strong reciprocal measures, which could lower the risk of a severe escalation of a trade war.

Gold ETPs attracted USD14.5mn, marking the first substantial inflow in six weeks. Rising Treasury yields and a pause in US Dollar weakness has made gold less attractive of late. However, gold’s role as hedge to adverse events makes it attractive to investors who are worried about geopolitical events turning ugly. So while investors continued to build positions in cyclical assets (see above), they placed hedges against the threat of a trade war breaking out after the Trump Administration applied tariffs to imports of steel and aluminium in the US by increasing allocations to gold.

US$15.9mn of inflows into short USD ETPs. Last week’s flows seem to indicate that investors are betting against the temporary reprieve in US Dollar weakness. Most of the flows went into long Japanese Yen, but long Sterling and long Euro were also beneficiaries.

Cocoa rally sparks profit taking. Between August 2016 and May 2017, cocoa ETPs saw close to US$84mn of inflows, when prices fell close to 45% over that period. Investors appeared to be bargain-hunting. Now that cocoa prices are rising once again (+35% since December 2017), many investors may be thinking of taking profit. Outflows accelerated last week to US$18.9mn (the highest weekly outflow) as prices rose 6.6% last week alone. Prices are rising after the International Cocoa Organisation (ICCO) said that it expects the surplus in production this year to be lower than last year and indeed revised downward the scale of stock overhang from last year. The presence of Cocoa Swollen Shoot Virus (CSSV) in Cote d’Ivoire (the largest cocoa producer) could limit the regions’ producing capacity in future years as maintenance programmes need to be undertaken to reduce the spread of the virus. The price of cocoa is already reacting.

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