Soft Growth Patch and US Rate Rise Concerns Hit Cyclical Assets ETFS Multi-Asset Weekly Soft Growth Patch and US Rate Rise Concerns Hit Cyclical Assets

Highlights

• Cocoa climbs to a 3-year high on Ebola virus concerns.
• Equity markets hit resistance near all-time highs.
• US dollar continues to strengthen as Fed signals policy normalisation.

Concerns about China’s growth outlook, stagnation in Europe and expectations of higher US interest rates put pressure on cyclical assets last week. Small cap and resource-linked equities were hit, a broad range of growth and interest rate sensitive commodities came under pressure as the US dollar moved higher. With China growth disappointing and Europe showing few signs of benefiting from recent ECB stimulus, markets appear on edge, particularly with expectations growing that US interest rates will start rising in H1 2015. In our view China growth will rebound later this year as government stimulus takes hold and the US recovery will help support global growth. Potential US rate increases and a strong dollar are a reflection of improving underlying US fundamentals and ultimately that improvement should benefit many cyclical assets. Commodities, in our view, have particularly strong rebound potential given their underperformance in recent years and many now trading at or below the marginal cost of production.

Commodities

Cocoa climbs to a 3-year high on Ebola virus concerns. Fears the Ebola virus may spread to the Ivory Coast, cocoa’s biggest producer, prompted a 5.4% gain in cocoa prices last week. With bordering Liberia and Guinea already plagued by the disease, there are concerns it is only a matter of time before the virus reaches the country. At the same time, the sugar price fell by 4.5% last week as the Brazilian cane harvest continued to progress well and monsoon rains in India have been steadily catching-up after a delayed start. Sugar is likely to remain under pressure in the near term as supply expectations for Brazil and India (together accounting for close to 40% of global output), remain abundant. The wheat price also continued to slide last week, dropping to a 4-year low. However, with wheat priced for perfect growing conditions, any small setback in weather could drive a price rally.

Equities

Equity markets hit resistance near all-time highs. With the exception of Germany, European equity benchmarks ended the week flat and the EURO STOXX 50® Investable Volatility Index dropped 7.8% over the past week, back near its all-time low. While a better-than-expected ZEW survey provided a boost to the LevDAX® x2 Index, up 2.1%, the decision of the Scots to remain part of the United Kingdom in their Independence vote last week will likely support UK equities in the coming week. Meanwhile, the underperformance of the Russell 2000® Index, which covers small cap US stocks, and the S&P 500 continues, indicating that investors continue to favour blue chip over riskier stocks as US equities hover near all-time highs.

Currencies

US dollar continues to strengthen as Fed signals policy normalisation. The US Federal Reserve has just taken the first step towards raising rates: announcing an end to its QE programme at its forthcoming meeting. We expect the US Dollar to remain supported, with the Fed signalling higher rates in 2015. The Fed’s last tightening cycle lasted from 2004 to 2006, when rates rose by 5 percentage points. While the UK remains united, we view the GBP rebound following the Scottish referendum as an opportunity to add to short GBP positions. The UK’s North-South economic divide is likely to cause policymakers headaches and has the potential to postpone rate rises and weigh on GBP. Eurozone banks failed to take advantage of the unlimited funds on offer from the ECB, taking up just €83bn of the ECB’s long-term refinancing funds. The ECB’s goal of significant balance sheet growth could be harder to achieve than expected and could prolong the depressed price environment

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