Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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COT: Record gold short while oil sees no selling appetite
Ole Hansen
Head of Commodity Strategy
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Commodities have experienced a couple of bruising weeks with the Bloomberg commodity index seeing all its gains for the year wiped out at one point last week. This came in response to increased worries about the direction of global growth and demand given the ongoing China-US trade war and the Turkey crisis highlighting the risk to emerging market economies challenged by high levels of dollar debt, a stronger USD, and rising costs of funding.
Despite of these headwinds, the total net-long futures and options position held by hedge funds across 26 major commodities only dropped by 3% in the week to August 14. In energy, the selling of crude oil and products was off-set by a big jump in natural gas while the metals sector continued to see broad-based selling. The grains sector was mixed while all four soft commodities were sold.
Hedge funds continued to reduce bullish oil and product bets in response to increased worries about an EM slowdown. Since hitting a record above one million lots (one billion barrels) on March 30, the combined long in WTI and Brent has now seen a 37% reduction. Given its role as the global benchmark, Brent crude oil has seen the biggest reduction to 336,000 lots, down 47% since March.
Despite the deteriorating outlook it is worth noting that both long and short positions were reduced last week. The gross-short in WTI and Brent of just 66,000 lots, however, remains close to the lowest in five-years. This highlights the limited selling appetite ahead of the expected Iranian supply drop but also how unprepared funds are should oil break below key support (i.e. the 200-day moving average).
Despite the deteriorating outlook it is worth noting that both long and short positions were reduced last week. The gross-short in WTI and Brent of just 66,000 lots, however, remains close to the lowest in five-years. This highlights the limited selling appetite ahead of the expected Iranian supply drop but also how unprepared funds are should oil break below key support (i.e. the 200-day moving average).
Gold remained under pressure last week from the stronger dollar and EM weakness. In response to the technical break below support at $1,205/oz, the net-short jumped by 13% to a fresh record of 77,000 lots. The market is currently transfixed by the negative impact on those EM economies maintaining large external debt in dollars at a time where both the dollar and funding costs are rising.
With such an elevated short, the risk of a snap recovery has risen and on that basis the market will be pay extra attention to the dollar, which has weakened a bit in response to new low level trade talks between the US and China, as well as Federal Reserve chair Jerome Powell speech on Friday at the Fed’s annual Jackson Hole conference.
Should Powell unexpectedly blink and signal a slowdown in the tightening process, the dollar could get sold and potentially send gold on a path to recovery. In silver the net-short jumped by 61% last week but at just 20,000 lots it remains just half of the record from April.
Copper, often seen as a gauge of the global economy’s health given its diverse usage profile, has falling by more than 20% from the four-year high reached just a few months ago back in June. Last week saw copper troubled by news that a potential supply disruption from the world’s largest mine in Chile that had been looming for weeks showed signs of being averted. Hedge funds, however, remained undecided in the week to August 14 with reductions in both long and short positions helping to cut the net-short by just 2% or 507 lots. The cut-off day, though, was just before the price slumped by 4% last Wednesday in response to Chinese growth worries.
Grains were net-bought despite the bearish WASDE report on August 10 which sent soybeans and corn sharply lower before recovering later in the week. The net-long in CBOT wheat reached a fresh eight-year high at 67,000 lots.
All four soft commodities were sold as the price outlook continued to deteriorate, not least sugar and coffee as EM currency weakness hit the BRL The net-short in coffee hit a fresh record of 98,000 lots while the above mentioned WASDE and much weaker Turkish lira helped reduce the cotton net-long for a second week.
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