EU referendum dominates ETP flows

Last week saw investors continue to purchase safe haven assets as inflows into precious metals totalled US$111mn.

Last week saw investors continue to purchase safe haven assets as inflows into precious metals totalled US$111mn. Year to date inflows into precious metals now total US$2.5bn, closing in on the highest six-month period of US$2.8bn witnessed in October 2012 when the gold price hit US$1900, prompted by concerns over quantitative easing and the Greek crisis. This time around, we see investor concerns over the risk of the UK referendum and its potential departure from the EU destabilising the global economy, the US elections and overly dovish US Federal Reserve monetary policy supporting the gold price. We saw inflows across the board in precious metals, gold, silver, platinum and palladium ofUS$73mn, US$17mn, US$15mn and US$1mn respectively, whilst some investors sold out of short silver positions. Safe haven investing also saw outflows from industrial metals ETPs.

Whilst palladium flows were relatively low, the trend now looks to have troughed after year of outflows. This chimes with our research which highlights the palladium has been in supply deficit for the last four years, trades well below marginal cost and is a key beneficiary of the EU6 regulations on car emission controls.

Long crude oil saw inflows for the first time after nine straight weeks of outflows. During those nine weeks, investors were selling long positions and purchasing short positions across the whole energy sector with the exception of heating oil. We see this more as profit-taking and risk aversion rather than a structural bearish view adopted by investors as the short positions have been relatively much smaller. We see the Brent fair value of US$55 per barrel at the year-end, reflecting the 75th percentile of the crude production cost-curve, where supply demand responses occur. Furthermore, we expect Iran production to have achieved a 6 to 9-month production peak due to reluctance from international oil companies to invest.

In currencies the biggest moves have been in Sterling ETPs, with short GBP rising from US$58mn at the beginning of the year to its peak today of US$117mn. Following a very similar pattern witnessed during the Scottish Referendum where flows peaked at US$124mn. Interestingly, due to the recent sell-off in GBP against a broad set of currencies, some investors have begun purchasing long positions in GBP, with the inflows into long GBP ETPs almost equalling the inflows into of short GBP ETPs over the last week.

Key events to watch this week. Investors will be closely following the UK’s EU referendum on Wednesday. The vote is dictating short-term sentiment, and in turn market movements. The polls are indicating a slight edge for the ‘Remain’ campaign, but investor optimism that is currently boosting cyclical asset prices will quickly unravel on any sign of the ‘Leave’ result becoming more likely.

James Butterfill – Head of Research & Investment Strategist – ETF Securities