Head of Commodity Strategy
Dollar weakness triggered a second week of net selling with the gross dollar long against eight IMM currency futures down by one-quarter during this time to USD 24.7 billion. Major contributors were fresh demand for EUR, flipping the position back to a net long, together with continued short covering in JPY and AUD.
The latest Commitment of Traders (COT) report, covering the week ending 7 May, saw two major themes emerge in a week where the sector as a whole recorded gains. The energy sector saw continued selling (long liquidation) leading to technical selling of the crude and fuel contracts, while natural gas attracted fresh demand. The biggest changes occurred in grains which saw increasingly aggressive short covering amid a continued rally driven by worries about weather-related crop losses of wheat in top exporter Russia, flooding impacting soybeans in southern Brazil, as well as concerns over the slow pace of US corn planting.
During the week, the Bloomberg Commodity Total Return Index rose 1% with gains in precious metals (+1.5%) and not least grains (+5.8%) being partly offset by losses in energy (-1.4%) and softs (-3.6%). On an individual level, selling was concentrated in crude oil, gas oil, RBOB gasoline as well as most softs led by coffee and cotton, while buyers concentrated their efforts in natural gas, platinum, and not least soybeans and corn.
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 main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's are:
Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.
Recent commodity articles:
8 May 2024: Fund selling exacerbates softening crude outlook
8 May 2024: Grains see bumpy start to 2024 crop year
6 May 2024: COT: Commodities correction spurs muted selling response
3 May 2024: Commodity weekly: Grains boost, correction in softs and energy
2 May 2024: Copper's momentum-fueled rally halts amid weakening fundamentals
29 April 2024: COT: Gold bulls stand firm despite recent correction
26 April 2024: Commodity weekly: Sticky inflation and adverse weather focus
23 April 2024: What drives the gold and silver correction ?
22 April 2024: COT: Declining momentum may signal shift toward consolidation
19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
15 April 2024:COT: Hedge funds propel multiple commodities positions beyond one-year highs
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
8 April 2024:COT: Speculative interest in metals and energy gain momentum
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
2 Apr 2024:COT: Gold and crude longs maintained amid strong underlying support
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
