Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Commodities see broad demand from speculators as the USD slumps to a net short
Ole Hansen
Head of Commodity Strategy
Key points:
- Positions and changes made by speculators in commodities and forex in the week to August 27
- Dollar position flips to a net short following biggest week of selling since March 2020
- Broad commodity buying supported by softer dollar, Libya disruption and weather worries
- Buyers focusing mainly on Brent, silver, copper, soybeans and sugar
Forex:
In the week to 27 August, continued dollar weakness helped trigger the biggest week of dollar selling since March 2020. The net sales of USD 13 billion versus eight IMM currency futures flipped the net USD position to a net short of USD 8 billion, the biggest since January. All currencies except the MXN saw net buying, and apart from notable buying of GBP and AUD, the change was led by the euro, where trades increased their net long by 66% ahead of the failed attempt to mount a challenge at EUR 1.12. Elsewhere, CAD saw a massive amount of short covering, but overall it remained the most shorted currency against the dollar. Buying of JPY continued, albeit at a much-reduced pace, with the net long reaching a fresh 3½-year high.
Commodities:
Large speculators, such as hedge funds and CTAs, turned broad buyers of commodities in the week to 27 August, overall supporting a 1% increase in the Bloomberg Commodity Index, which tracks a basket of 24 major commodity futures, all of which are tracked in this update. Excluding natural gas, which slumped by 10.5%, the index traded up 1.7%, with 22 out of 26 futures seeing net buying.
While the softer dollar provided a generally commodity-friendly backdrop, we saw several developments support the individual sectors and commodities. The energy sector received a boost—short-term as it turned out—from Libya’s supply disruption, while weather developments, especially in the US and Brazil helped support key food commodities from grains to sugar, cocoa, and coffee. Elsewhere, gold had a quiet week, trading near a record high after Jerome Powell, the Fed chair, confirmed a US rate cut was on the agenda at this month’s FOMC meeting. Silver, meanwhile, enjoyed the tailwind from a recovering industrial metals sector, not least copper, before running into firm resistance above USD 30.
Overall, these developments saw hedge funds being net buyers of all sectors, led by grains and softs, while on an individual basis, demand was strongest for crude oil, especially Brent, silver, copper, soybeans, and sugar.
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.
Recent commodity articles:
30 Aug 2024: Commodities sector eyes fourth weekly gain amid softer dollar and Fed expectations
27 Aug 2024: Month-long sugar slide pauses amid concerns of Brazil's supply
27 Aug 2024: Libya supply disruptions propel crude prices higher
26 Aug 2024: COT: Funds boost metals investment as dollar long positions halve amid weakness
23 Aug 2024: Commodities Weekly: Metal strength counterbalancing energy and grains
22 Aug 2024: Persistent supply contraints keep cocoa prices elevated
21 Aug 2024: Weak demand focus steers crude towards key support
19 Aug 2024: Resilient gold bulls drive price to fresh record above USD 2500
19 Aug 2024: COT Buyers return to crude as gold stays strong; Historic yen buying
16 Aug 2024: Commodities weekly: Gold strong as China weakness drags on other markets
9 Aug 2024: Commodities weekly: Calm returns to markets, including raw materials
8 Aug 2024: Sentiment-driven crude sell-off eases, allowing traders to focus on supply risks
7 Aug 2024: Limited short-selling interest observed during copper's recent aggressive correction
6 Aug 2024: Video: What factors are fueling the current market turmoil and gold's response
5 Aug 2024: COT: Broad commodities sell-off gains momentum; Forex traders seek JPY and CHF
5 Aug 2024: Commodities: Position reduction in focus as volatility spikes
2 Aug 2024: Widespread commodities decline in July, with gold as the notable exception
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