U.S. fiscal cliff sets dilemma for ETP investors in November

Fri Dec 7, 2012 7:44am EST

* Energy futures ETPs attract $225 mln in net inflows
    * Precious metals have mixed month
    * Investors shun broad commodities ETPs

    By Claire Milhench
    LONDON, Dec 7 (Reuters) - Conflicting signals from the U.S.
"fiscal cliff" negotiations confused investors in commodities
exchange traded products in November, some of whom hugged the
safety of gold whilst others sought out riskier energy and base
metals ETPs.
    The term "fiscal cliff" describes an increase in U.S. taxes
and cuts in spending that will take effect in January if
Congress cannot agree ways to cut the U.S. deficit. Investors
worry that if implemented, the austerity measures could tip the
United States back into recession. 
    This would be negative for the more economically-sensitive
commodities such as energy and industrial metals. Yet BlackRock
data show energy ETPs attracting a solid $225 million in net
inflows in November and industrial metals some $16 million,
whilst safe haven precious metals attracted $1.713 billion.
    This mirrored wider investor indecision over ETPs, with
Treasuries attracting some $2.7 billion, whilst riskier emerging
market equities and bonds drew in around $6.2 billion, BlackRock
said. 
    Broad commodities ETPs experienced net outflows of $8.4
million, suggesting asset allocators were in "risk off" mode.
    "With the uncertainty regarding Europe and the fiscal cliff
in the U.S., investors have been cautious with respect to
allocations into this asset class," said Dodd Kittsley, global
head of ETP research at BlackRock.
    ETPs, an an easy route into commodities for investors,
include exchange-traded funds, exchange-traded commodities and
exchange-traded notes. All trade on a stock exchange and their
value is linked to the underlying assets.
    Ole Hansen, head of commodity strategy at Saxo Bank,
identified uncertainty around the fiscal cliff negotiations as
one of the key drivers for markets in November, along with the
U.S. Presidential election and renewed worries about Greece.
    At times, there were "some knee-jerk reactions in both
commodities and financial markets due to the confusing signals
coming from the President and the Republican-led Congress," he
said in a note. 
    Guy Wolf, a macro strategist at Marex Spectron, added that
market stress had prompted some unwinding of positions by hedge
funds in November, with a flurry of investor redemptions. 
    "In the old days, market stress resulted in high
correlation," he said. "But now everything is already correlated
so in times of market stress you get dispersion."
    
    ENERGY BOOST
    Energy futures ETPs attracted investors on the back of
improved economic data from China and the United States, the two
biggest oil consumers in the world. Instability in the Middle
East also boosted petroleum prices, resulting in a 1.97 percent
gain for the S&P GSCI Energy index in November.
    But global energy equity ETPs had outflows of $400 million
over the month. "With an opaque economic climate, the
profitability of energy companies remains uncertain for many
investors," Kittsley said. 
    Industrial metals did well, with the S&P GSCI's sector index
up 6.41 percent, partly due to optimistic demand expectations
for 2013, notably from China, S&P said.
    Hansen agreed that rising hopes China had turned the corner
were the main reason for investor interest, but added that
Hurricane Sandy, which left thousands of U.S. homes without
electricity for days, had triggered a rise in battery
consumption, supporting lead. 
    Gold and other precious metals had a mixed month, with
silver ETPs registering $104 million in outflows, whilst gold
drew $1.776 billion in net inflows. 
    Hansen noted that gold had experienced a small crisis
of investor confidence in late November after a sell-off where
the price dropped by $25 an ounce in seconds.
    Wolf added that U.S. investors were selling their gold
holdings to realise capital gains and avoid a possible rise in
capital gains tax next year. "That's a significant factor in
what's going on in gold right now," he said. 
    Agriculture ETPs had another poor month, with some $116
million of outflows. S&P said that the sector's 1.96 percent
decline in November was the biggest drag on overall S&P GSCI
returns. 
    It added that a slump in soybean prices was to blame, after
a U.S. government report in early November showed a
larger-than-expected domestic soybean crop, prompting some
unwinding by hedge funds. 
    At the end of November, BlackRock's data covered 910
commodity ETPs, worth some $205.9 billion. 
    
  
    
    Global commodities ETPs at end-November (US$ mln)
 SECTOR                FLOWS       ASSETS UNDER MANAGEMENT
 Total                 1,830       205,915
 Broad/Diversified     -8          19,671
 Agriculture           -116        6,484
 Energy                225         9,348
 Industrial Metals     16          2,639
 Precious Metals       1,713       167,773
    Source: BlackRock
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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