Overview: The Chinese economy continues to show evidence of strong demand, which has helped lift investor appetite for cyclical assets. Optimistic investors are now looking ahead for directional cues, and the key development will be the US Federal Reserve monetary policy meeting….
ETF Securities Research
While the US economy is strengthening, it does not appear to be at a self-sustaining point and inflationary pressures remain in check – two reasons that could give the Fed some leeway to continue its stimulus program. In our view, while a degree of tapering is already priced into financial markets, the accompanying statement will be critical to the performance of asset markets. With the consensus clearly favouring some ‘tapering’ activity, the alternative scenario will be the Fed keeping the status quo.
Commodities: Precious metals have most to benefit if Fed keeps status quo. Gold has been the commodity most under pressure as real interest rates have risen sharply in recent months in response to expectations that the Fed will move to reduce its bond purchase program. While investors appear to be pricing in some ‘tapering’ activity, the alternative scenario will be the Fed keeping the status quo. Commodity prices, particularly gold and silver, would benefit under such a scenario, with the US dollar likely to weaken as the monetary taps remain wide open. Meanwhile, the easing of geopolitical tension has weighed on the energy sector. The deal struck between Russia and the US regarding Syrian chemical weapons is likely to keep downward pressure on oil prices in the near term. Additionally, supply remains strong, particularly in the US, with production reaching the highest in over two decades. Reinforcing the strong supply outlook, the IEA has upped its production estimates for 2014, on the back of expectations for further US production gains.
Equities: Shipping rally gains momentum, as global equity benchmarks recover. Most international equity benchmarks recorded solid increases, with the outlook for global economic activity staying bright. The best benchmark equity performance came from Italy, with the FTSE MIB Leveraged (2x) Index surging over 8% last week. DAXglobal Shipping Index was again the best performing thematic index last week, as rising shipping rates continued to boost company valuations. Evidence of continued strength in the Chinese economy is helping buoy investor optimism about the outlook for global growth and in turn global seaborne trade. The S-Net ITG Global Agribusiness Index also posted strong gains, as some fertiliser companies rebounded after the sharp falls following the effective breakup of the Belarusian Potash Company.
Currencies: USD weakens ahead of FOMC meeting. The US Dollar weakened against most G10 currencies last week, despite expectations that the Federal Reserve is likely to reduce the amount of stimulus it provides to the US economy. If the Fed diverges from current expectations, the US Dollar could see further declines, as some ‘tapering’ is already priced in. With risk appetite rising, investors have looked to more cyclically-linked currencies like the New Zealand Dollar and Norwegian Krone for FX exposures. A continuation of the strong economic readings for the UK economy saw the GBP the best performing currency pair in the G10, with the UK currency reaching an 8-month high against the US dollar. The Indian Rupee rebounded strongly last week, with investors taking heart from the reforms that the new Reserve Bank of India Governor has announced in recent weeks.
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