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European ETP flows show signs of an interesting trade, says Deutsche Bank


European ETP cash flow patterns this week paint a very interesting picture. The week brought nothing unusual in the long equities space, mild negative pressure continued leading to a total of EUR226 million of equity ETF outflows. The only country that experienced inflows over EUR100 million was Germany, but that was by no means a game changer. DAX benchmarked ETFs gathered a moderate EUR175 million over the week.

Fixed income and commodities investment patterns this week yielded much more interesting information, with fixed income ETFs experiencing inflows of EUR339 million and commodity ETPs experiencing outflows of EUR493 million. Fixed income inflows were led by sovereign benchmarked ETFs (EUR300 million), primarily German government bunds (EUR210 million). Commodity ETP outflows were driven by gold product outlows (EUR463 million).

Historically, gold ETP inflows spiked during periods of negative equity market pressure and high volatility. Similarly, during such periods, other perceived safe assets, such as bonds issued by highly rated sovereigns, experienced inflows. The week just passed registered a departure, with gold ETPs loosing close to 50% of 2012 YTD flows, as market uncertainty rose.

The week that ended on 11 May saw gold ETPs experiencing outflows of EUR463.1 million, bringing year to date ETP inflows down to EUR541.9 million. Conversely, ETPs targeting volatility indices saw year to date inflows rise to EUR614.9 million.

Gold – USD/oz- price (BBG ticker GOLDS) declined by 12.8% from its high point this year, (28/2/12: USD1,784.2/oz), to its low point (14/05/12: USD1,5567/oz). Conversely, over the same period, the price of the VSTOXX (BBG ticker: V2X), an index designed to measure volatility of the Eurozone by looking at implied vol on Euro Stoxx 50 index options, rose by 37.5%, reaching 33.3 as of May 15th, its highest point in 2012.

The decline in gold’s price is most likely due to a combination of escalating market worries and political uncertainty in Europe, coupled with the lack of monetary accommodation both in the US and Europe. Together, these factors resulted in more extreme risk aversion than the environment that historically led to gold inflows.

The large majority of gold outflows came from Swiss based physically backed gold ETPs.

Most of the YTD volatility inflows were received by the Nomura Voltage Mid-Term Source ETF, a product that tracks an index which allocates exposure of between 0% and 100% to the S&P 500 VIX short-term futures index, with the remainder earning a three-month US treasury bill rate. The proportion of the strategy index invested in futures contracts varies dynamically, with allocations increasing, the more “spot” volatility exceeds a 30-day historical average.

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