Investors have begun to rotate away from defensive assets such as gold and the Swiss Franc into cyclical assets such as industrial metals and oil..
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The surprisingly quick appointment of a new Prime Minister and the formation of a new Cabinet in the UK provided investors some relief in a month of heightened uncertainty. Investors sold out of defensive assets like gold and the Swiss Franc and bought cyclical assets like copper and oil. Short positions in GBP were reduced as the Bank of England held off from cutting rates, taking the market by surprise. Investors continued to build shorts in UK equities and sold long positions.
Gold and CHF ETPs see first weekly outflows since Brexit, while goldminers see inflows. Gold prices declined 1.8% last week as some of the uncertainty around UK politics was assuaged with the appointment of a Prime Minister and the formation of a new Cabinet. Also the strong US payrolls data for the month of June proved to be gold-price negative. US$41.4mn flowed out of long gold ETPs. Long CHF ETPs, another defensive asset, saw outflows in order of US$21.8mn. The outflows from long gold ETPs were relatively small compared to the inflows of over US$1bn in the prior five weeks. While investors sold gold ETPs, they bought gold miner equity ETFs, possibly to capture equity market beta. Inflows of US$9.9mn into gold miner ETFs marked a 10 week high.
Investors rotate into industrial metals. Investors bought close to US$40.8mn of long broad industrial metal ETPs and a further US$27.4mn of long copper ETPs in a clear indication that the ‘risk-off’ mode expressed by markets earlier this month is fading. With Chinese industrial production, money supply, retail sales and GDP figures all beating expectations last week, we believe that sentiment toward industrial metals will continue to improve. Indeed with copper, zinc and nickel expected to remain in a production deficit this year, prospects for these metals look positive.
Crude oil ETPs see the largest inflows since April. Bargain hunting is back after oil prices fell to US$45/bbl from over US$51/bbl at the end of June. Last week we saw inflows of US$21.8mn into long crude oil products (the third consecutive week of inflows) and US$7.2mn of outflows from short crude oil products.
Investors reduce short GBP exposure but continue to short UK equities. We saw US$23.2mn of outflows from short GBP ETPs as confidence in the UK was partially restored and the Bank of England held off from delivering a widely expected rate cut. However, that vote of confidence was not shared by equity investors, who added US$9.2mn to short UK ETFs, marking the third consecutive week of inflows since Brexit and withdrew US$9.5mn from long UK equities.
Key events to watch this week. Markets will remain focused on the ECB press conference following the policy decision on Thursday. They will be poised for clues on whether the quantitative easing programme will be extended beyond March 2017. The Q2 Euro area bank lending survey, which will be released this week, may offer insights on the efficacy of programme.