Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Hedge funds propel multiple commodities positions beyond one-year highs
Ole Hansen
Head of Commodity Strategy
Key points:
- Commitment of Traders report highlighting futures positions and changes made by speculators across forex and commodities during the week to April 9
- Limited gold and crude reaction to well-flagged Iranian attack; Fresh US/UK sanctions lift aluminum and nickel prices
- Speculators boost several in-demand commodities length beyond their one year highs
Gold and crude oil's response to Iran's drone and missile attack
Iran's well-flagged attack on Israel over the weekend triggered a muted reaction overnight in Asia with Brent touching USD 91 before turning lower. Crude prices already included a risk premium, and unless the market faces a real disruption to supply, the risk of an upside spike towards USD 100 remains limited. All eyes now on Israel, and their response, especially after President Biden urged restraint and after Iran said they do not intend to continue strikes.
Gold trades a tad firmer after suffering a near USD 100 correction on Friday, but with a major risk premium already priced in and with the dollar being the short-term safe haven focus, the combination of yield strength following last weeks surge, the metal may struggle to regain last week’s strong momentum, instead entering a period of consolidation. Watch support at USD 2320 followed by USD 2290.
Limited impact of US/UK restrictions on Russian metal sales
On Friday, the US and the UK took further action to limit Russian profit from the trading of its copper, aluminum and nickel. The latest order restricts Russian metals mined after April 13 from entering the metal exchanges in London and New York. Traders responded to the news by sending aluminum and nickel higher on the Asian opening by around 9% before pairing back most of those gains in the realisation this action may not fundamentally change the overall supply-demand balance. China holds an outsized influence on the mined metal market, a role that will only have strengthen by this action, leaving them in a position to force even deeper discounts from Russian suppliers.
COT on forex
In the forex market, flows ended up being somewhat mixed, but for a fourth week in a row still skewed towards dollar buying, resulting in the gross dollar long vs eight IMM forex futures rising by 10% to USD 17.8 billion, a fresh 19-month high. Selling of CHF, GBP, JPY and CAD being partly offset by shortcovering in EUR, nearly doubling the net-long, and AUD, as well as continued demand for high-interest paying MXN driving the net long to a fresh four-year high.
The JPY net short jumped to 162k contracts (USD 13.5 billion) and highest since 2007 while the CHF short at 32k contracts (USD 4.4 billion) was the highest in almost five years.
COT on Commodities
In the week to April 9, the Bloomberg Commodity Total Return index rose 2.2% to trade near a six-month high, led by strong gains across precious (+4.6%) and industrial metals (+5.7%). Excluding natural gas, the energy sector rose 2.2% and was among these three sectors managed money accounts from hedge funds to CTA’s focused their buying interest while the agricultural sector saw a very mixed reaction.
Overall, the big three markets of crude oil, copper and gold all saw net buying which lifted the total net long to a July 2021 high at 772k contracts, representing a nominal value of USD 96 billion. Weeks of buying in response to an improved technical and fundamental outlook for key commodities saw several positions extend beyond their one-year highs, most notably: Brent (2-1/2-year high), RBOB Gasoline (+3 yr high), Gold (near 4-year high), Silver (2-year high), HG Copper (2-1/2-year high), Arabica coffee (record high), Lean Hogs (10-year high)
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 main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's 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
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.
Commodity articles:
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
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
27 Mar 2024: Crude oil maintains support amidst array of bullish signals
26 Mch 2024: Gold's behaviour points to sustained demand
20 Mch 2024: Attacks on Russian refineries lift risk premium and crude prices
19 Mch 2024: How to add copper exposure to your portfolio
15 Mch 2024: Commodity weekly: Green shoots seen across key sectors
13 Mch 2024: Lack of catalyst pushes crude into tightening range
8 Mch 2024: Commodity weekly: Gold and silver steal the limelight
8 Mch 2024: Investing with options - Gold optionality
6 Mch 2024: How to add gold exposure to your portfolio
6 Mch 2024: Video: What happened to the gold prices?
1 Mch 2024: Grains dip, cocoa soars, gold and oil see rays of strength: February’s commodity mix
Previous "Commitment of Traders" articles
8 April 2024: COT: Speculative interest in metals and energy gain momentum
2 Apr 2024: COT: Gold and crude longs maintained amid strong underlying support
25 Mch 2024: COT: Hedge funds zoom in on crude, copper and silver
18 Mch 2024: COT: Hedge funds buying expands from precious metals to copper and grains
11 Mch 2024: COT: Specs rush back into gold, elevated yen short in focus
4 Mch 2024: COT: Underinvested speculators fuel gold's latest surge
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