The recent global stock market sell-off has resulted in the steepest decline in years for many major markets. Fears that China’s economy is dramatically slowing have sparked heavy selling around the globe
Gold posted a third consecutive week of gains and gold ETPs finally broke a 10-week streak of outflows. Uncertainty around China’s currency policy, volatile equity markets and the realization that a September Fed hike is not a done deal drove the price higher
Gold ETPs see highest inflows since January. Physical gold ETPs received US$230.6mn of inflows last week, as rising prices has lifted the negative sentiment against the metal. Futures market shorts have also been trimmed for the fourth consecutive week. While a confluence of factors has driven gold prices higher, a standout observation was that the VIX index rose 87% last week, signaling a market shift from greed to fear. Gold has traditionally been the first port of call in times of market stress.
Eight consecutive weeks of oil ETPs inflows follow sharp price declines. Bargain hunting continued last week with US$71.8mn of inflows into long oil ETPs. Brent fell 5.3% and WTI declined 2.6%, as the global production surplus accelerates. WTI had fallen to a 6 ½ year low. ETP investors realize that such low prices will drive a reduction in capex and eventual fall in production, but for now crude inventories in the US are still rising, depressing the price. US oil rigs also continue to reopen, adding to supply. ETP investors will need to be patient and bear with the lag in the response from producers.
ETFS Daily Leveraged Natural Gas (LNGA) received highest inflows in 11 weeks. Natural gas inventories rose less than expected (53Bcf vs. 59% Bcf expected), driving a temporary rally last Wednesday and Thursday. The current period of seasonally high demand from the power sector’s air conditioning needs will likely come to an end in autumn and could place downward pressure on price. LNGA received US$4.3mn last week.
Investors trimmed long coffee ETP exposure by US$4.3mn. With the Brazilian harvest coming close to an end, the realisation that last year’s drought has led to smaller bean sizes this year has driven up prices in recent weeks. However, a benign winter has minimised frost-damage and so what the harvest lacks in quality will be made up for in quantity, which has driven prices lower over the past week. Coffee suffers from a weak Brazilian Real, which has encouraged Brazilian farmers to offload stocks cheaply. Sugar conversely rose 1.2% last week, as concerns around poor monsoon rains in India could lead the market into balance for the first time in six years. Long sugar ETPs attracted US$1mn of inflows.
ETFS Palladium Trust (PALL) saw US$12.0mn of redemptions, the highest since September 2014. With Chinese auto demand remaining soft, prospects for global autocatalyst demand, which accounts for 70% of palladium use, remains poor. However, tightening emissions regulation in Europe in September could see the loadings of platinum group metals rise.
Key events to watch this week. Central bankers will convene at Jackson Hole, Wyoming at a pivotal juncture in the Fed’s rate cycle. Consensus expectations are for a September hike, but speeches and presentations by policy makers could sway opinions.
Nitesh Shah - Research - ETF Securities
2015 could be the year we finally see rising interest rates in the U.S. This creates an opportunity to reassess portfolios and asset classes and evaluate how they performed during historical periods of rising interest rates. While the past can never guarantee the future, historical context is important for understanding a phenomenon that we really haven’t seen in a longer-term trend for approximately 30 years.
Bonds vs. Stocks
The critical question here—as in many environments—is stocks versus bonds. By design, the fixed nature of bond interest payments creates a bit of a headwind as rates rise. On the other hand, rising interest rates usually occur in tandem with rising inflation, and stocks have historically grown their dividends at a level above that of inflation over long periods.1
Big Picture: To the extent that rising interest rates reflect rising growth expectations and rising inflation expectations, we believe that equities can see a tailwind and perform quite well over the medium to long term, even if U.S. Federal Reserve (Fed) activity (or inactivity) can cause some short-term volatility.
Further Distinctions to Be Made
Also here – as in many environments – it’s not just stocks versus bonds, but types of stocks versus types of bonds.
Within equities, we wanted to look at three categories: large caps (the S&P 500 Index), small caps (the Russell 2000 Index) and high-yielding dividend payers (the Dow Jones U.S. Select Dividend Index). While this certainly doesn’t exhaust all equity possibilities, it does provide an interesting cross-section of a few major categories—indicating how they reacted in different periods of rising interest rates.
Within fixed income, we examined the difference between a pure government bond exposure (interest rate risk, but not credit risk), a high-quality bond index and a high-yield bond index (less interest rate risk, more credit risk). Within equities, we looked at dividend-paying stocks.
We’d expect higher-yielding dividend payers to face a headwind, while more growth-oriented companies could be better positioned to grow their dividends with rising interest rates and rising inflation.
We looked at times when the U.S. 10-Year Treasury note rose 100 basis points (bps) or more and saw the following:
- High-Quality and U.S. Government Fixed Income Faced a Headwind: Both the U.S. 10-Year Treasury note and the Barclays U.S. Aggregate Index experienced negative average returns during our rising rate periods.
- High-Yield Fixed Income Performed Better: While the BofA Merrill Lynch High Yield Index delivered differentiated performance with respect to the other two fixed income options, it was still able to generate a positive average return during the rising rate periods. It actually outperformed an index of high-yielding dividend payers on an average annual basis over these periods.
- Equities Strong to Quite Strong: Both the S&P 500 Index and the Russell 2000 Index tended to perform better during the rising rate periods than over the entire period. This fits with what we mentioned earlier—that equities can perform well when rising rates signal improvements in growth and generally rising inflation.
- Small Caps Were Especially Strong in Rising Rates: With the exception of the first rising rate period, from October 15, 1993, to November 7, 1994, the Russell 2000 Index delivered a double-digit return in every period. Its average annual return during the rising rate periods was 15.1%, versus its average annual return during the full period at 8.6%.
1 Source: Professor Robert Shiller, with data measured from 31/12/1957 to 30/06/2015 for the S&P 500 Index universe
Viktor Nossek - Director of Research - WisdomTree Europe
Interestingly gold remained resilient, seeing its price rise in US dollar terms for a second straight week, despite outflows from gold ETPs. The key to the commodity complex’s fortunes is China’s growth path and the market is on the lookout for further stimulus in the country
The OECD estimates global infrastructure investment requirements of $50 trillion by 2030. SSGA launched SPDR Morningstar Multi Asset Global Infrastructure UCITS ETF. Lesné (SSGA): “It's the world’s first ETF that combines both equity and fixed-income exposures to infrastructure”