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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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COT: Crude oil sold on fading OPEC+ impact; Metal positions flip back to net short
Ole Hansen
Head of Commodity Strategy
Summary: Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to Tuesday, October 18. A week that saw stocks rebound after a solid start to the corporate-earnings season helped offset continued growth worries. The dollar traded softer and bond yields higher while commodities adopted a defensive stance with the biggest amount of net selling hitting crude oil, gold, corn and coffee.
Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.
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This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to Tuesday, October 18. A week that saw stocks rebound from oversold levels after a solid start to the corporate-earnings season helped offset continued worries about how far central banks are prepared to hike rates in order to combat inflation through forcing a reduction in economic activity.
With exception of the JPY, the dollar traded softer against most major currencies while bond yields rose ahead of a mid-week spike that saw 2-year yield jump to the highest since 2007 as traders pushed expectations for the peak policy rate closer to 5% by early 2023. Commodities traded defensively throughout the week with losses seen across most sectors led by energy, especially natural gas which slumped by close to 13%.
Commodities
The Bloomberg Commodity index lost 3.2% during the reporting week with losses being led by the energy sector where the market reversed some of the gains seen in the previous week when OPEC and Russia announced their surprise production cut. Natural gas slumped 13% on the week while renewed yield strength and economic worries sent most metals sharply lower with funds reversing back to net short position in gold, silver and copper.
Responding to these developments, speculators cut their total exposure across 23 major commodity futures by 7% to 1.037,869 contracts with the biggest amount of net selling hitting crude oil, gold, corn and coffee with buying concentrated in soybean oil, sugar and hogs.
Energy
Responding to renewed weakness, speculators cut bullish WTI and Brent crude oil bets by a combined 57k lots to 353k lots, thereby reversing the bulk of the buying seen in the aftermath of OPEC+ decision to cut production. The change was led by a combination of longs (-42k lots) bailing out of recently established positions and fresh shorts (+15k) being added. The product market was mixed with buying of the two distillate contracts while gasoline length was reduced. Funds increased their natural gas short by 6% to 82.5k lots in response to a near 13% drop on continued mild weather and rising production.Metals
Sellers returned to the metal sector with the recently established small longs in gold, silver and copper being flipped to decent size short positions while platinum’s small gain on the week managed to attract additional fresh longs.Agriculture
The combined long in across the six major grain and oilseed contracts held steady around 471k lots with buyin of soybean oil being offset by selling of corn and wheat. In softs the main action was seen in coffee where months of relative robust price action supported by tight market conditions gave way to a 10% slump driving a 64% reduction in the net long to just 12k lots, an 18 month low. Sugar meanwhile saw net buying with the net long jumping 36% to 107k while recession worries reduced the cotton long to 22k lots and lowest since July 2020. Forex
In forex, flows remained mixed during a week that saw the dollar index trade softer by 1% after recently hitting a 20-year high. Overall the gross dollar long against nine IMM currency futures and the Dollar index rose by 5% to $15 billion, primarily driven by heavy JPY selling as the under siege currency dropped 2.3% towards the important 150 level. Elsewhere, a recovering Sterling saw net selling with speculators reducing the gross long more than offsetting fresh short selling.
Speculators continued to buy euros and since August 30 when EURUSD traded around €1 they have bought €12 billion, driving their net futures exposure from a 48k lots short to a 48k lots long, a four-month high.
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