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Take Two

August 2016

The relief rally in commodities eases Post-Brexit as crude oil and base metals slip

Dollar, oil Muted
The US dollar weakened further in the aftermath of July 27 FOMC meeting. Oil prices also sank further from their 3-month low following Fed’s decision on an unexpected build in US stockpiles (up 1.7m bbl), the first week on week build since the start of May. According to Ole Hansen, Head of Commodity Strategy, Saxo Bank, crude oil remains range-bound with the short-term risk skewed to the downside. A break below $44.50 could see WTI targeting support at $42.50. Overall, as FXTM Chief Market Strategist Hussein Sayed says, the outlook of the commodity currencies bloc remains bearish as Fed members are slowly building up expectations to tighten this year and softer commodity prices will only increase the pressure on high yielding assets.

BoJ Resists Strong Stimulus
Investors betting on major central banks especially Japan to keep taps wide open for the foreseeable future, were taken aback when Bank of Japan’s stimulus moves disappointed investors on July 29. Data in second week of July showed Japan’s industrial output in May fell 2.6% on a monthly basis, more than the 2.3% fall previously anticipated. The yen rebounded slightly after a two-day drop of 4% over the past two days amid hopes that the Bank of Japan is preparing to loosen monetary policy further when it meets by the end of July. However, that was not to be. Instead of the new, radical steps, that include helicopter money, BoJ announced a small expansion of its stimulus policies, at least for now. The underwhelming Japan stimulus package sent the global equity markets tumbling, though a detailed impact of the move is yet to be ascertained when this publication went to print.

Demand for UK securities dip
Demand for UK securities fell sharply during the three weeks after Brexit, with cumulative non-resident fund outflows from mutual funds and ETFs amounting to some $1.9 billion, IIF data show. Equity funds saw net outflows of around $1.8 billion over the past three weeks, bringing year-to-date equity outflows to over $2 billion. However, bond flows have been somewhat better sustained, with gilts seeing some safe-haven demand. Moreover, triggered by the sharp GBP depreciation, demand for inflation-protected UK bonds has been robust; in contrast, mortgage-backed securities saw net outflows, highlighting investor concerns about UK property prices after Brexit.

Muted Demand for Natural Gas
Bank of America Merrill Lynch in its report titled, “World at a glance: August: Global macro” dated 27 July 2016, forecasts muted demand for natural gas in 2016. A very strong El-Niño just delivered the warmest winter on record in the US, resulting in a collapse in NYMEX nat gas prices to the lowest levels since 1999. Inventory levels stood at 2.5 tcf at the end of winter (end of March), the highest seasonal level ever, the report says. Other than weather, economic nat gas demand drivers have been rather absent in recent quarters, exacerbating the glut.

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