Escalation of violence in Libya and fears of Middle East contagion drives Brent oil prices above $110/bbl and a surge in trading volumes and inflows into oil ETPs..…
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– Rising risk aversion drives gold price to within 1% of all-time high, with ETFS seeing strongest new inflows into gold ETCs in 4 months.
– Equities and cyclical commodities drop on concerns the sharp rise in oil prices will derail the global economic rebound and drive inflation higher.
– Following downward revision to US 4Q GDP growth last week, manufacturing data will be a key focus this week as an indication of global growth momentum.
Unrest in the Middle East and North Africa sends oil prices to 2.5 year highs, gold to 7 week highs and sharp rise in oil ETP trading and inflows. Increasingly violent clashes in Libya solidified expectations of production shutdowns in the world’s 12th largest producer and fears of political unrest in the Middle East. Unrest in Libya, Bahrain, and Yemen has prompted investors to buffer portfolios against further contagion, driving the price of gold above $1400/oz mark and Brent oil price to over $110/barrel. Investors have been using oil ETPs as a hedge against Middle East political risk, with flows into ETFS oil ETCs rising by almost $100mn last week, bringing total inflows this year to just over $200mn, compared to net outflows of over $230mn over 2010. ETFS Gold ETPs saw inflows of $80mn last week, reversing the outflow trend seen through much of the first part of 2011.
Risk aversion drives peripheral European bond yields back towards record levels while weak UK growth data highlights fragility of economic recovery. Peripheral European bond yields surged back towards record levels last week as global risk assets sold off on the back of deteriorating conditions in Libya. At the same time, data released last week showed that UK growth momentum slipped more than expected in 4Q 2010, complicating the task of the BOE balancing the growth drag of fiscal tightening while trying to bring down 4%+ headline inflation. The rest of Europe faces a similar dilemma, with unemployment in the peripheral European economies holding at stubbornly high levels while cost-push inflation continues to rise. Data released late last week showed German inflation was stronger than expected at 2.2%. Eurozone February inflation will be released on Tuesday.
Purchasing manager surveys this week will likely set the macro tone for markets. While developments in North Africa and the Middle East will likely remain the main driver of market performance this week, the durability of the economic recovery rightly remains the main medium-term driver of the market outlook. Manufacturing surveys for February due out across Europe and the US will be critical in gauging the resilience of the growth recovery. The February US ISM, on Tuesday, will be of particular focus given the importance of the US economic recovery to the global economy. Given the exceptional strength of the January data, risks to current expectations and risk perceptions would appear to be skewed to the downside. Gold, oil and other risk hedge and defensive asset will likely remain in favour.
Global Commodity ETP Trends
• Inflows into commodity ETPs continued to surge, taking inflows over the past month to over half a billion dollars. Precious metals and diversified ETPs saw the largest inflows.
• A strong economic recovery at the start of 2011 in developed economies, set against heightened global risks/uncertainties – including unrest in the middle East and rapidly rising inflation pressures – may be behind the move towards more diversified commodity ETP inflows recently.
• Precious metals have seen a resurgence of interest, with almost $50mn of inflows in the past week contrasting with over $2.5bn in outflows YTD. Increased inflows have coincided with rising risk aversion in markets associated with the escalation in Middle East unrest.
• Silver has seen the strongest inflows amongst precious metals, with over $400mn in inflows last week. Investors may view silver’s mix of industrial and precious metal characteristics as fitting well with the current environment of improving growth with high tail risks.
Source: ETFWorld – ETFSecurities
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