An inconclusive Italian election result and the start of an US$1.2tn program of spending cuts in the US weren’t enough to stop investors rotating into more cyclical assets last week.

A stronger US Dollar saw ETP investors continue to shun gold, with February 2013 recording the largest outflows since January 2011. Copper and Brent crude oil were key beneficiaries of improving, but still fragile, risk appetite. Strength in the US housing market, where new home sales surged to a 4-1/2-year high, buoyant consumer confidence, rising manufacturing activity, and encouraging words from the Federal Reserve’s Chairman about the likely length of monetary easing kept the appeal of cyclical commodities.

However, as the gravity of the political deadlock both in the US and Italy settles in, investors are likely to be attracted by the defensive nature of precious metals such as gold and silver. Meanwhile, Haruhiko Kuroda, the government’s nominee to lead the Bank of Japan, will have tough job of meeting the new inflation target of 2% given the February reading came in at -0.3%.

Familiar currency-debasement hedges, like precious metals should remain appealing for investors as five major central banks meet this week, likely signalling intentions for any additional stimulus. Political maneuvering will dominate headlines and be a key catalyst for commodity price direction as Italian election and US budget negotiations drag on.

ETFS Brent (OILB) received US$28.4mn, the largest inflows in 12 months, ahead of international diplomatic discussions with Iran over its nuclear program. Current export sanctions against Iran have restricted the global supply of crude oil. Investors positioned themselves for a further crimping of supply. According to a Bloomberg survey, OPEC crude output climbed as a gain by Libya outweighed a cut by Saudi Arabia. Both Brent and WTI crude oil front month prices fell last week, erasing all the gains made this year, as negotiators indicated that Iranian nuclear discussions were constructive.

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