Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Crude long slumps; agriculture sector in demand
Ole Hansen
Head of Commodity Strategy
Summary: This summary highlights futures positions and changes made by hedge funds across commodities, forex and bonds in the week to last Tuesday, 7 November. A week that included the market reaction to the November 1 FOMC meeting when Fed Chair Powell sent a strong hint to the market that the Federal reserve is done hiking rates. While that message was modified last week, the initial bullish reaction in the week to November 7 helped drive a sharp reduction in bond yields and the dollar while stocks surged, and volatility tumbled.
Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities while in forex we use the broader measure called non-commercial.
What is the Commitments of Traders report?
The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.
Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)
The main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's are:
- They are likely to have tight stops and no underlying exposure that is being hedged
- This makes them most reactive to changes in fundamental or technical price developments
- It provides views about major trends but also helps to decipher when a reversal is looming
Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.
Commodity weekly: Crude oil risks overshooting the downside
Video: Crude tumble drives worst week since March
Global Market Quick Take: Europe – 14 November, 2023
This summary highlights futures positions and changes made by hedge funds across commodities, forex and bonds in the week to last Tuesday, November 7. A week that included the market reaction to the November 1 FOMC meeting when Fed Chair Powell sent a strong hint to the market that the Federal reserve is done hiking rates. While that message was modified last week in order to prevent markets from running ahead of themselves, the initial bullish reaction in the week to November 7 helped drive a sharp reduction in bond yields and the dollar while stocks surged, and volatility tumbled. Commodities meanwhile headed for their worst week since March on a combination of growth concerns hitting the energy sector and profit taking weighing on metals while the agriculture sector traded firmer.
Commodity sector
The commodity sector failed to respond to the general risk-on seen across other markets with the Bloomberg Commodity index trading lower by 1.5% on the week, led by significant losses across the energy sector and profit taking in precious and platinum group metals. Overall, these developments saw leveraged funds, such as hedge funds and CTA’s cut their overall exposure for a second week. The hardest hit were crude oil and natural gas followed by corn, cotton, silver and platinum. In demand were copper, soybeans, sugar and hogs.
Special note on crude oil: Hedge fund selling of crude oil extended to a third week with the combined net long in WTI and Brent slumping to a four-month low at 312k contracts, down 44% since September when the focus on tight markets led by Saudi production cuts peaked before demand worries began taking over. In WTI, the 179k lots slump to 136k lots since September 26 has been driven by 74k lots of fresh short positions and 105k lots of long liquidation. In Brent, the global benchmark, the changes have been less dramatic with a 68k lots reduction in the net long to 176k being driven by a small 6k lots increase in shorts and 62k lots of long liquidation. Given the accelerated price collapsed following November 7, it is fair to speculate positions have been reduced even further, potentially creating the foundation for another bounce, especially after WTI and Brent found support below $75 and $80 respectively
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