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Way paved for further policy stimulus says ETF Securities

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The weekly note from ETF Securities reports that the European Central Bank revised downwards its growth and inflation forecasts, paving the way for further policy stimulus, while the Chinese authorities followed suit, revising their growth expectations down to 7.3 per cent this year from 7.4 per cent earlier.
 

The firm writes: “The US Federal Reserve is likely to maintain caution in this environment and hold off raising rates in September despite falling unemployment. A number of central banks meetings this week (Bank of England, Bank of Canada, Reserve Bank of Canada), will shed light on how other policymakers have interpreted the recent volatility.”
 
Turning to commodities, ETF Securities reports that a persistent surplus is having its effect on oil prices. “Oil capped its biggest three day rally in 25 years after the weekly build up in US crude oil stocks rose by 4.7 million barrels” the firm writes. “Saudi
Arabia reasserted its stance to maintain market share by lowering its official selling prices for October. President Obama clinched sufficient votes in the US Senate to secure the Iranian nuclear deal reinstating the oversupply in oil market.”
 
Gold has lost its lustre on the back of a strengthening US dollar, says ETF Securities, while sugar prices were positively impacted by fears of heavy rainfall impacting the Brazilian sugar cane harvest and a sharp rise in Thai sugar exports to China.
 
In terms of wheat, the negative impact of the stronger US dollar on US exports coupled with ample EU wheat supply extended wheat’s downward trajectory. China’s downward revision of GDP forecasts is likely to can the industrial metal price rally seen last week, the firm says.
 
Turning to equities, the global equity market sell off continues amid weaker PMI and US payrolls data, according to ETF Securities. The firm writes: “France’s purchasing manufacturers index (PMI) data shrank more than expected while stronger German PMI data helped drive a rebound in the DAX in the second half of the week. UK Services grew at the weakest pace in more than two years in August, weighing on the FTSE 100. A mixed labour market report, showing below-expectations payrolls but a surprising fall in unemployment, helped maintain equity market volatility.”
 
Meanwhile, implied S&P volatility (VIX) rose to 27.1 (up 4 per cent), while small-cap equities (Russell 2000) fell 0.7 per cent. Chinese equities responded positively to the interest rate cuts from the prior week, but continued intervention from the government casts doubts as to whether the gains are sustainable, the firm says.
 
In currencies, the US dollar staged a comeback after the August jobs report. “Currencies from commodity exporting nations bore the brunt of the dollar’s gains. While the gain in US jobs were weaker-than-expected, the highest average hourly earnings since March and the lowest jobless rate since April 2008 (considered to be full employment by the Federal Reserve) raised the appeal of dollar denominated holdings. The Euro retreated on the back of an increasing likelihood of further easing after the ECB meeting.”
 
The Swedish krona climbed to a six week high versus the Euro after the Riksbank kept its repo rate unchanged at 0.35 per cent confirming the current stimulus is helping steer the economy out of a deflationary trap. Disappointing second quarter GDP growth and
an unexpected decline in retail sales caused the Australian dollar to hit six year lows his week.”
 

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