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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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COT: Funds switch exposure from agriculture to metals
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 10. A week that saw stong risk appetite in response to China reopening and as the dollar dropped and bond yields softened. Commodities meanwhile saw aggressive selling across the agriculture sector being partly offset by continued and strong demand for gold and copper
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
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This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to last Tuesday, January 10. A week that saw strong gains across the equity market as the dollar and bond yields fell on rising speculation that incoming inflation data would show further softening, thereby helping to build the case for the Federal Reserve to slow its pace of rate hikes. These developments together with the prospects for a recovery in China after it abandoned its stringent covid restrictions and added a series of stimulus measures helped support a continued and strong rally across precious and industrial metals led by gold and copper.
Commodities
Hedge funds opened their 2023 accounts by aggressively cutting exposure across the agriculture sector while buying was concentrated in a few metal contracts led by copper and gold. Overall the gross long across the 24 major commodity futures tracked in this fell by 15% to 1,194,000 contracts, the biggest one-week drop in six months. The total open interest across these reached an eight-week high at 13.49 million contracts with all three sectors seeing increased positioning, both long and short.The changes - using Bloomberg Commodity Sector indices - was in line with price developments across the different sectors with gains in precious (0.6%) and industrial metals (1.7%) being offset by losses in energy (-3.9%) grains (-2.7%), softs (-3%) and livestock (-1.5%). The 87k contracts reduction across the grains sector was primarily driven by corn which ahead of Thursday’s price supportive WASDE saw bullish bets being cut by 24% to 150k contracts. The softs sector saw broad selling with the total 87k contracts reduction being driven by sugar’s 27% reduction to 175k contracts.
Energy:
Crude oil saw net selling for a second week after a near 10% drop during the first few days of trading rattle the market and helped reduce the combined net long by 13.6k contracts, most of the activity being focused on WTI long liquidation (-10.8k) and fresh short selling in Brent (+10k). Natural gas’ continued slump, this time by 9% to a September 2021 low helped drive a 35% increase in the net short across four Henry Hub deliverable futures and swap contracts to 97.6k contracts, and highest since March 2020.Metals:
For a second week, speculators concentrated their buying efforts in gold and copper as both metals continued to build on the positive momentum that has been developing since early November. The gold net long reached 82.6k contracts, an eight month high, and during six consecutive weeks of buying the net long has rising almost three-fold.Copper, meanwhile, saw accelerated buying as funds following months of trading the metal with a short bias, were forced to play catchup as the price continued to break higher through several layers of resistance. The net long jumped 20.5k to 28.8k contracts, a nine-month high on a combination of longs being added and shorts being reduced.
Agriculture:
Ahead of Thursday’s for corn bullish WASDE report, speculators had wrongly as it turned out in response to a 2.3% selloff cut their net long by 24% to 149.6k contracts. All the three major crops saw net selling with a +6% tumble in wheat on raised competition with Black Sea sellers, helped increase the net short in CBOT wheat by 20% while the KCBT wheat flipped to a net short for the first time since August 2020. In softs, the sugar long was cut by 27% while a continued coffee crumble, down 9.3% on the week to a 17-month low, drove a 154% increase in the net short to 30k contacts, the biggest bet on lower prices since November 2019. Forex:
In a week that saw broad dollar weakness, an exception being against the Japanese yen, speculators only increased their dollar short exposure against nine IMM futures and the Dollar Index by 9% to $4.7 billion. Flows ended up being were very mixed with net buying of EUR, AUD and not least the JPY being offset by net selling of CHF, GBP and CAD.Following the reporting week, the Japanese yen rallied strongly by more than 3% ahead of this weeks crunch Bank of Japan meeting, and although sharply reduced in recent weeks, the JPY short at $3.4 billion equivalent remains the biggest short besides the dollar. The CAD meanwhile has struggled given its close association with the dollar, and despite rallying 1.8% against the greenback, the net short nevertheless reached a 29 month high while the Dollar index net long dropped to a 17 month low.
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