Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Oil sold again with gold, coffee and sugar in demand
Ole Hansen
Head of Commodity Strategy
Summary: The latest Commitments of Traders report from the US Commodity Futures Trading Commission covering the week to October 23 showed that leveraged funds cut their net-long position across 26 major commodities futures contracts by four percent.
Saxo Bank publishes two 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.
To download your copy of the Commitment of Traders: Commodities report for the week ending October 23, click here.
The latest Commitments of Traders (COT) report from the US Commodity Futures Trading Commission covering the week to October 23, showed that leveraged funds cut their net-long position across 26 major commodities futures contracts by four percent.
The reasons why we primarily focus on the behaviour of leveraged funds:
• 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
While nineteen contracts were net-sold the broad-based reduction was limited in size due to the strong buying of a few commodities, most noticeably sugar, coffee, and precious metals. The energy sector remained under selling pressing with the combined long in crude oil slumping to a 15-month low. Precious metals were bought for a second week and with the tailwind from short-covering fading, gold and silver are now increasingly in need of fundamental support to carry them higher.
Leveraged funds continued to exit the energy sector during the week to October 23. A Saudi pledge to produce as much oil as possible, and the stock market rout, have sharply reduced concerns about the Nov. 4 implementation of US sanctions against Iran. Four weeks of selling has seen the combine long in Brent and WTI crude oil crumble by one third to a 15-month low of 577,000 lots.
The combination of the global rout in stocks, the trade-war-leading-to-lower-growth narrative, a seasonal weak period for demand and Saudi’s pledge to pump, has sharply reduced the risk of a price spike once US sanctions against Iran begin on November 4. However, given the yet unknown impact on Iran’s ability to produce and export the sharp reduction in bullish bets has now helped create a more balanced market in terms of speculative positions. On that assumption and provided $75/b in Brent continues to provide support we could see some speculative buying emerge ahead of November 4.
The combination of the global rout in stocks, the trade-war-leading-to-lower-growth narrative, a seasonal weak period for demand and Saudi’s pledge to pump, has sharply reduced the risk of a price spike once US sanctions against Iran begin on November 4. However, given the yet unknown impact on Iran’s ability to produce and export the sharp reduction in bullish bets has now helped create a more balanced market in terms of speculative positions. On that assumption and provided $75/b in Brent continues to provide support we could see some speculative buying emerge ahead of November 4.
Gold was bought for a second week running and during this time the record short position has been cut by 74% to just 26,899 lots, a three-months low. Silver was also bought but given the current focus on safe-haven demand it continued to struggle relative to gold. Both copper and platinum saw renewed selling in response to the global equities rout, a weaker yuan and demand concerns.
Gold is now increasingly in need of supporting fundamentals to carry it higher. This after the tailwind from short covering begins to fade given the sharp reduction witnessed during the past few weeks. Support is being provided by the continued uncertainty in global equities and the decline in US bond yields. Against this we have the risk of the dollar continuing to strengthen, not least against the euro and the yuan, which are troubled respectively by political uncertainty in Europe and the pressure on the Chinese currency to weaken further beyond 7 per dollar.
Gold is now increasingly in need of supporting fundamentals to carry it higher. This after the tailwind from short covering begins to fade given the sharp reduction witnessed during the past few weeks. Support is being provided by the continued uncertainty in global equities and the decline in US bond yields. Against this we have the risk of the dollar continuing to strengthen, not least against the euro and the yuan, which are troubled respectively by political uncertainty in Europe and the pressure on the Chinese currency to weaken further beyond 7 per dollar.
Leveraged funds maintained a net-short close to the five-year average in the three major grains contracts of soybean, corn and wheat. This on a combination of trade war concerns and the harvesting of bumper corn and soybean crops.
Wheat, meanwhile, attracted some attention on Friday when it jumped back above $5/bushel on signs that the latest slump had finally yielded a price low enough to compete with grains from other regions, especially the Black Sea area. Up until then wheat had been under pressure with the rising dollar rendering it unable to compete for export orders. A 55% jump in the net-short up until last Tuesday helps to explain the strong buy reaction since Friday afternoon when Egypt’s state-run General Authority for Supply Commodities (GASC) announced they had bought American wheat, the first purchase since the 2016-17 season.
Wheat, meanwhile, attracted some attention on Friday when it jumped back above $5/bushel on signs that the latest slump had finally yielded a price low enough to compete with grains from other regions, especially the Black Sea area. Up until then wheat had been under pressure with the rising dollar rendering it unable to compete for export orders. A 55% jump in the net-short up until last Tuesday helps to explain the strong buy reaction since Friday afternoon when Egypt’s state-run General Authority for Supply Commodities (GASC) announced they had bought American wheat, the first purchase since the 2016-17 season.
Of all the commodities coffee and sugar saw the biggest amount of buying last week in response to the ongoing rally which has seen both contracts rally by more than 30% during the past month. Last week, however, coffee found resistance at $1.25/lb and sugar at 14.25 cents/lb as the tailwind from short-covering began to fade and the market awaited the impact of the Brazilian presidential election.
It was won by Jair Bolsonaro and the swing to the right could see the resource-rich economy open up to private investments. The CME BRL future trades higher by 1.5% while in Tokyo overnight an ETF tracking the Bovespa Index jumped by more than 10%. It was the rally in the BRL combined with the big short positions that helped drive the surge this past month. This rally may now begin to fade unless some fundamental support begins to emerge.
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