ETFS Multi-Asset Weekly Lingering Threats Depress Investor Sentiment

Highlights

Stars align for commodity markets.

China equity markets higher, but volatility reigns.

USD weakness unlikely to last.

Concern about Greek finances, alongside disappointing German growth data resulted in European equity benchmarks finishing the week in the red. In contrast, Chinese equities moved higher in choppy trade as soft data lifted expectations of further stimulus from policymakers. Defensive investors prompted a gold rally, with its perception as a hedge against lingering threats to the economic environment increasing its appeal. We expect the soft US economic data will fade and the growth divergence with the Eurozone will again become pronounced and pull forward expectations for a rate hike, in turn lifting the USD.

Commodities

Stars align for commodity markets. Natural gas surged following expectations of warmer US weather is boosting demand for natural gas to fuel additional demands for power. With storage remaining adequate and not far from the longer-term average level, we expect the duration of this rally to be short-lived. Rising bond market volatility and a weaker US Dollar buoyed precious metals markets, with silver leading the way. Gold was also buoyant as investors remain cautious and European equities traded choppy ranges. With silver remaining strongly tied to gold, the key for a sustainable rally in silver lies in rising industrial demand. A good indicator of whether this demand component is rising is stockpiles which unfortunately are not showing signs of decline yet. If sentiment improves, a correction could lie in wait.
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Equities

China equity markets higher, but volatility reigns. Chinese equities received a boost despite a string of poor economic data, as investors were optimistic that Chinese authorities will introduce additional stimulus measures to buoy the economy. Choppy trading has characterised Chinese equity markets and we expect that is unlikely to disappear in the near term, until investors see a more stable underlying economic environment. Certainly both the Reserve Requirement Ratio remains elevated and we expect that the RRR and official rates could be lowered in coming months. Meanwhile, European equity markets lost ground as weaker growth in Germany in Q1 added to the negative tone surrounding the lingering threat of Greek default. UK equity markets also struggled after the Bank of England downgraded its outlook for UK economic growth. Although we expect potential for further near term setbacks, in the medium term, equity valuations should be bolstered by rising demand on the back of low financing costs as a result of low policy rates and depressed energy prices.

Currencies

USD weakness unlikely to last. We expect the recent batch of soft US economic data to be an aberration rather than the beginning of a trend and this should gradually translate into USD strength. This week’s FOMC minutes will be balanced, in line with previous communications, but should keep rate hikes on the table. While the market has pushed back rate hike forecasts somewhat in recent weeks and is currently expecting the first increase in November, we expect a September move. Central banks will continue to be in the spotlight, with both the Bank of England and the Bank of Japan holding meetings. While there should be little change in UK policy, if Japanese industrial production and Q1 GDP growth disappoint, that could be the catalyst to provoke the BOJ to act, and in turn pushing the USD/JPY higher toward our year-end target of 125.

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”).