Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Speculators take a fresh look at metals and grains after exodus
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 August 2. A week that saw a strong recovery in risk appetite following the dovish US rate hike which helped send bond yields and the dollar lower, thereby supporting a recovery in recent under-pressure metals, both precious and industrial.
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.
This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to August 3. A week that saw a strong recovery in risk appetite following the dovish FOMC 0.75% rate hike on July 27 when Fed Chair Powell signaled the Fed could slow the pace of rate hikes. A comment he may regret after Friday’s strong US job report forced a reprising of future rate hikes with another 0.75% back on the table next month. The reporting week also saw bond yields trade softer while the dollar index lost close to one percent.
Commodities
Speculators in commodities reacted very mixed to the mentioned developments with strong gains in metals, both precious and industrials being more than offset by losses in energy and agriculture commodities, most notably natural gas, gas oil, wheat, and sugar.Overall, the Bloomberg Commodity index traded softer by 0.6% with speculators showing no firm conviction after increasing bullish bets across the 24 major commodity futures tracked in this by 1% to 853k, a small recovery from the two-year low recorded the previous week. Biggest reductions seen in crude oil, natural gas and sugar with net buying concentrated in metals, soybeans, and corn.
Energy: The recent weakness in crude oil prices and refinery margins in response to signs of softening demand helped drive an overall 29k contracts reduction in bullish crude oil bets to 353k lots, the second lowest level since April 2020. The reduction was primarily driven by speculators exiting gross WTI longs amid a continued release of oil from strategic reserves and weekly data pointing to a softening in gasoline demand.
Metals: Weeks of heavy precious metal selling reversed last week after the sector, led by silver, staged a strong comeback following the dovish US rate hike which led to speculation the FOMC could potential start cutting rates next year. Gold’s 3.1% rally supported a reversal in the net position from a rare net short, the first since April 2019, to a small net long of 28k contracts. The continued recovery in copper after it recently found support at the key $3.15 level helped support a near 9% rally in silver and a 52% reduction in the net short to 8.4k contracts.
Agriculture: Having cut bullish bets across six major grains and soy contracts by 64% since the near record peak at 813k lots in mid-April, speculators showed signs of renewed interest last week. The net longs in corn and the soy complex rose for the first time in 11 weeks on a combination of fresh longs and gross short positions being reduced. Wheat continued to see net selling with the net short in CBOT wheat jumping by 44%, this following the opening of Ukraine export corridor.
All four softs contract were sold and following weeks of net selling, the sugar position finally flipped to a net short for the first time in 25 months, thereby potentially setting the stage for a recovery. Coffee and cotton remained firmly out of favor as well with net longs dropping to 15 and 24-month lows, respectively.
Forex
Speculators cut bullish dollar bets against ten IMM futures and the Dollar Index by 7% to $21.9 billion in the week to August 2, a week that saw risk appetite improve following the dovish rate hike from the US Federal Reserve. The change was led by strong buying of JPY with the net short reduced by 30% to a 14-month low at -42.7k lots on a combination of fresh buying and short covering. Net buying also seen in EUR, CAD, NZD and MXN with selling concentrated in AUD, CHF and GBP.
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 reasons why we focus primarily on the behavior of the highlighted groups 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
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