Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Brent preferred over WTI; Gold length at nine month high
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, January 24. A week where the dollar and commodities traded steady as the China Lunar New Year got underway. Broad buying of commodities in recent weeks narrowed as speculators concentrated their buying interest in crude oil and fuel products as well as gold, copper, corn and cotton
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 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
Financial Markets Daily Quick Take
Saxo Market Call Daily Podcast
This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to last Tuesday, January 24. A week that saw modest gains across stocks, with the tech-heavy Nasdaq the exception as it jumped 2.5% ahead of major earnings from tech titans starting with Microsoft. The dollar and commodities traded steady with the Chinese LNY having a dampening impact on activity. Bond yields traded softer as inflation pressures continued to ease driving speculation the FOMC may consider a one-and-done rate hike at their meeting this Wednesday.
Commodities
The Bloomberg Commodity Index (BCOM), which tracks a basket of major commodity futures ended flat on the week as continued gains in metals, led by gold and copper, as well as softs led by coffee short covering, were being offset by broad losses in grains and weakness in energy, primarily driven by another slump in natural gas. The prospect for a China reopening boost to demand for key commodities from crude oil and fuel products to copper and grains has been the main engine behind the strong start to 2023. However, as China emerges from a week-long holiday the hard work begins as a pick-up in activity on the ground is now needed to support and confirm the strong price gains and accumulation of speculative positions seen across several commodities this past couple of months.
Speculators responded to these developments by turning more selective in their investment approach. The result being a week that saw additional length being added to crude oil, fuel products, gold and copper while the agriculture sector, with a few exceptions, saw net selling across all three sub-sectors of grains, softs and livestock.
Energy
Money managers increased their net long position in Brent crude by 40k contracts to 252k, the highest since March, while the buying in WTI continued to be more muted with the net long only rising 6k to 188k contracts. The result being a 46k increase in the combined net long to 441k contracts to an 11-week high. Since early December funds have bought 153k contracts of Brent while the WTI length has only increased by 22k contract. During this time WTI’s front month discount has steadily been widening, to the current $7 per barrel while the Brent prompt structure has returned to backwardation while WTI remains in contango, both developments making Brent more attractive from a buy, hold and roll perspective.
The three fuel contracts saw net buying as well, led by RBOB and gasoil while the natural gas contract, despite another hammer blow of selling, saw a small amount of short covering.
Metals
The current preference for gold over the other two semi-investment metals of silver and platinum was on display once again last week. In the month to last Tuesday, silver and platinum traded lower by 1.2% and 1.5% respectively while gold rallied by 6.2%, and this discrepancy in performance helped drive another week of gold accumulation from money managers while silver and platinum length were reduced. The net long in gold jumped 14% to 107k contracts, a nine-month high.
Three weeks of strong copper buying has lifted the net long to near a 15-month high at 41k contracts. The bulk of that length having been added after the HG copper contract first broke the 200-day moving average at $3.85, and then the support-turned-resistance in the $4 area.
Agriculture
The grains sector, led by the soybean complex saw broad selling with corn being the notable exception. It is interesting to note that the CBOT wheat short reached a fresh 44-month high at 74k contracts, this in a week where the price of front month wheat dropped 2.3% before finding support at a trendline going back to January 2022. Following the latest rejection, wheat has subsequently moved higher to challenge resistance around the 50-day moving average, currently at $7.6.
Arabica coffee, another member of the trio of most shorted commodities, found support from an improved fundamental outlook, and the 5.8% rally during the reporting week supported a 9% reduction in the net short to 37k contracts. Short covering is likely to have continued in the days that followed as the price made further strides towards the next major hurdle at $1.75.
Forex
In forex, speculators were net sellers of dollars against the nine IMM forex futures contracts tracked in this. Adding changes in the Dollar index position, the overall change in the gross short was relatively small with buying of EUR and a further reduction in the JPY short to the lowest since March 2021 being somewhat offset by selling of CHF, CAD and NZD.
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