GBP short positions are back to pre-referendum announcement levels

The futures market has highlighted an increasing probability of rate hike this year, weighing on commodity prices. Consequently, gold saw small outflows last week representing only 1% of inflows this year.

The futures market has highlighted an increasing probability of rate hike this year. While the markets are pricing in a lower probability of a rate increase this week, the implied probability of a rate move in December has risen. This has weighed on gold as it is typically inversely correlated to the US dollar. Consequently, we saw outflows of US$43m last week, marking only the fifth weekly outflow this year. The outflows also represent 1% of total inflows this year, suggesting that negative sentiment towards gold following mild hawkish rhetoric at the US Federal Reserve (Fed) are not causing wide-spread panic amongst investors. Our analysis has found that gold typically performs poorly in the run-up to a Fed rate hike and then recovers afterwards. The threat of inflation, political instability, negative real interest rates and worries over volatility in both bonds and equities after a rate hike are likely to support gold in the longer term.

Opinion on the direction of the US dollar remains divided amongst investors despite the increasing probability of a rate hike this year, with inflows of US$5m into long and US$2m into short positions respectively.

AuM in GBP short ETPs has now fallen back to levels not seen since prior to the EU referendum announcement in February. However, we have seen little inflows into long GBP post-Brexit, suggesting that while investors see that GBP has reached a floor, they are not optimistic for a recovery at this point.

Industrial metals saw continued outflows last week totalling US$15m. Copper has been the hardest hit, with continued outflows last week of US$13m, and US$36m for the month. China’s slowing growth fears and cooling of the property market coupled with rising inventories has probably led to this weak sentiment. Copper has underperformed the rest of industrial metals and we believe there is catch-up potential. It is likely to go into a 7th consecutive year of supply deficit, miners capex cuts are likely to exacerbate this situation and negative sentiment appears overdone as we see continued growth in metals consumption.

Key events to watch this week. The key event this week is the FOMC rate decision on Wednesday evening. The central bank is widely expected to keep rates on hold but probabilities of a rate rise have been increasing for this year following a stronger than expected inflation publication. Prior to the FOMC meeting is the BOJ rate announcement, where we expect further stimulus.

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