Overview: Cyclical asset prices lifted last week, following signs that the global economic recovery is gaining pace. The upside surprise for global PMIs last week, indicating that the manufacturing sectors are expanding in the US, China and Europe boosted industrial…
ETF Securities Research
metal and energy prices. The US economy demonstrated that it is on a firm footing with GDP growth of 1.7% annualised in Q2, far better than consensus estimates. Despite some disappointment over the US nonfarm payrolls in July, the jobs market remains robust. Further positive news from China this week should ease concern about a ‘hard landing’ for the economy and reinforce the bullish momentum for cyclical commodity prices. Last week’s central bank meetings, which showed ongoing commitment to keep liquidity conditions accommodative, while resisting the temptation to restrict expansionary policy too soon, should continue to support cyclical asset prices.
Cyclical upswing provides support to energy and industrial metals. Better-than-expected US, China and Europe PMIs helped investors renewed their optimism in the global manufacturing environment. The price of tin rose 8.2% last week on the back of tightening export standards in Indonesia. While rising crude prices is attracting profit-taking trades, the strength in the US recovery has helped absorb the glut of oil weighing positively on the performance of oil and distillates prices in the recent months. US natural gas inventories are now below their 5-year average, while US crude inventories hover near their 2013 lows, fuelling the optimistic outlook for the energy sector. EIA’s colder winter forecast for 2013 and continued recovery of the US economy should support demand for energy commodities in the coming months.
Global equity markets rally as manufacturing surprises to upside in China, Europe and the US. Better-than-expected readings for several key widely watched economic indicators last week supported global equity markets, with the FTSE® MIB Leveraged Index leading the way, up 4.6%, while the LevDAX® x2 Index rose 2.6% over the same period. The European manufacturing sector posted its first expansion since July 2011 and coupled with lower unemployment has boosted optimism that the Eurozone may be recovering. UK manufacturing activity also beat expectations, supporting the FTSE 100® Leveraged Index, which rallied 2.9% over the week. In our view, the improving global economic outlook should continue for the remainder of 2013 and add to the strong performance momentum for equities markets. The DAXglobal® Gold Miners Index, on the other hand, declined 3.5%, as the price of gold remained soft, partially reversing the index strong gain during the previous week.
Australian Dollar (AUD) and New Zealand Dollar (NZD) fail to take advantage of cyclical optimism. The antipodean pair of the Australian and New Zealand dollars were the big losers last week, with NZD tracking the AUD lower, despite the renewed optimism over the outlook for the global recovery. With the Australian mining sector’s fortunes heavily tied to Chinese growth, recent pessimism about China’s slowdown has heaped pressure on the Australian currency. Coupled with growing expectations of an interest rate cut from the Reserve Bank of Australia, the AUD has been the worst performing currency in recent months. However, a sharp upward retracement could be in store, as investor positioning is extremely negative and any positive economic news (or the RBA keeping interest rates on hold at tomorrow’s meeting) could prompt a short-covering rally.