Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Funds boost metals investment as dollar long positions halve amid weakness
Ole Hansen
Head of Commodity Strategy
Key points:
- Positions and changes made by speculators in commodities and forex in the week to August 20
- Dollar long cut in half as rate cut focus drove broad weakness
- Gold, silver and copper see demand as the dollar and Treasury yields drop
- Crude oil selling resumes with the gas oil (diesel) short jumping to a 15-month high
Forex:
In the week to 20 August, the dollar fell around 1%, with broad losses driving a 56% reduction in the dollar gross long vs 8 IMM futures to USD 4.9 billion, a five-month low. The reduction was primarily driven by a doubling of the euro long to 56k contracts (USD 4 billion equivalent), continued GBP buying, and not least CAD, where speculators recently held a record short position amid the outlook for a faster rate cut trajectory in Canada compared with the US. A negative view that was challenged in the past couple of weeks—forcing short positions to be closed—as the chance of a September US rate cut rose. Elsewhere, the first JPY net long since March 2021 held steady last week.
Commodities:
The reporting week saw global financial markets continue a strong rebound, with early August's market turmoil now a distant memory. Instead, increased expectations for a September US rate cut helped drive stock markets sharply higher and the dollar and long-end US Treasury yields lower. Elsewhere, China, the world's top consumer of commodities, showed small signs of improvement, and the combination of lower funding costs and demand recovering saw industrial metals put in a strong performance, with the BCOM Industrial Metal Total Return Index rising 4.5% on the week. Precious metals enjoyed the incoming tailwind from lower funding costs, while the energy sector remained troubled by signs of weakening demand, not least for diesel.
Overall, these mixed signals for commodities saw buying of industrial and precious metals offset by selling of energy, softs, and to a lesser extent grains. On an individual level, hedge funds increased their gold long to a four-year high, the copper net long jumped 84% from near neutral, while the wheat net short was reduced by 28%, and the natural gas long jumped 43%. Selling was concentrated in crude oil and gas oil (diesel), as well as soybeans, corn, 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:
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
31 July 2024: Crude's month-long slide halted by fresh Mideast worries
30 July 2024: Record demand explains gold's current resilience
29 July 2024: COT: Energy and metals selling cuts hedge fund long to four-month low
4 July 2024: Sluggish US economic indicators boost demand for gold and silver
4 July 2024: Podcast Special: Quarterly Outlook - Sandcastle Economics
2 July 2024: Quarterly Outlook - Energy and grains in focus as metals pause
1 July 2024: COT: Crude long builds ahead of Q3 while grains selling accelerate
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