Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Record corn short, cocoa surge no longer supported by speculators
Ole Hansen
Head of Commodity Strategy
Summary: Our weekly Commitment of Traders update highlights futures positions and changes made by hedge funds and other speculators across commodities and forex during the week to last Tuesday, February 20. A week that saw global equity markets maintaining an underlying bid ahead of long-awaited earnings from Nvidia. The dollar meanwhile was heading for its first weekly loss this year, and together with China growth optimism it helped support short covering across precious and industrial metals. The grains short reached a record high while an ongoing cocoa surge is no longer supported by speculators.
Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities while in forex we use the broader measure called non-commercial.
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.
This summary highlights futures positions and changes made by hedge funds across commodities and forex in the week to last Tuesday, February 20. A week that saw global equity markets maintaining an underlying bid ahead of long-awaited earnings from Nvidia. The dollar meanwhile was heading for its first weekly loss this year while bond yields traded near a three-month high as traders continued to price the prospect of a delayed start to the US rate hike cycle being followed by fewer cuts than previously expected. The commodities sector meanwhile traded lower with gains in metals, both precious and industrial, being offset by losses in energy and agriculture.
Commodities:
The Bloomberg Commodity index, which tracks a basket of 24 major futures markets split between energy (30.1%), metals (34.2%) and agriculture (35.7%), traded lower for a second week, this time by 0.5% with losses in energy and agriculture being only partly offset by broad gains across the precious and industrial metal sectors. Overall, the number net long held by money managers held unchanged around 200k lots (NOTE: we have added London cocoa and Robusta coffee to the table) with net long positions held in 16 out of the 26 major futures contracts tracked. Do note that we have added London cocoa and Robusta coffee to the table this week.
On an individual level, buyers concentrated their efforts on WTI crude oil, gold, silver, copper, and cotton while sellers lifted their natural gas short to a four-year high and their grains short (corn, soybeans, and wheat) to an all-time high. US grain and oilseed markets have posted historic declines so far this year with a 12% drop in the Bloomberg Grains index being driven by a recovery in global supplies, and prospect for a bumper harvest in South America ahead of the Northern Hemisphere planting season.
Speculators no longer to blame for ongoing cocoa surge
Cocoa futures extended their parabolic surge last week, rising 17% to record a year-to-date gain of 58%. The ongoing surge has been driven by a worse-than-expected deficit in 2023-24, the third in a row, due to adverse developments in West Africa, the world’s top producing region, accounting for around 75% of global production, due to harmful intense dry winds lowering production while small-lot farmers struggle to receive an income large enough for them to afford much needed but expensive pesticides and fertilizers to combat diseases while maintaining production from ageing trees.
Arrivals of bags from cocoa farmers to ports in Ivory Coast, the number one shipper, are currently down around one-third on last year, and with the mid-season crop after March now also looking challenged, it has raised concerns about the availability of cocoa to meet already agreed sales obligations, potentially leaving some of the major chocolate producers short changed, forcing them to enter the futures market to secure supplies, inadvertently turning buyers of futures instead of normal selling (hedging) activity.
As a result, the one-year futures spread (backwardation) between May 2024 and May 2025 has blown out to 20% as the producers bid up the spot market in order to secure supplies and to cover hedges. Looking at the COT data we find producers increasingly being the main buyer as they cut short positions while hedge funds have been net sellers for weeks, in the process cutting their net long to an 11-month low.
Commodity articles:
22 Feb 2024: Copper short squeeze fades ahead of key resistance
21 Feb 2024: Gold's resilience despite recent futures and ETF selling
20 Feb 2024: WTI crude eyes resistance amid improved signals
16 Feb 2024: Commodity weekly: Grains tumble; Industrial metals eye China boost
15 Feb 2024: US rate cut delay drives gold below $2000
13 Feb 2024: Video: What is driving Cocoa's sweet price
9 Feb 2024: Commodity weekly: Refined product strength lifts crude
9 Feb 2024: Podcast: Year of the metals
7 Feb 2024: Crude oil supported by tightening fuel outlook
6 Feb 2024: Gold and silver turn defensive on reduced Fed rate-cut optimism
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
30 Jan 2024: Gold and silver look to FOMC for direction
29 Jan 2024: Video: Unpacking the reasons behind soaring coffee prices
26 Jan 2024: Commodity weekly: Back in black supported by China stimulus
25 Jan 2024: Grains up on short covering; softs supported by tight supply
24 Jan 2024: Disruption risks drive specs into Brent; distorted EIA report up next
23 Jan 2024: Silver and copper in focus after recent declines
19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
Previous "Commitment of Traders" articles
19 Feb 2024: COT: US inflation surprise drives broad selling of metals
5 Feb 2024: COT: Speculators chase false crude break; grain short extends further
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
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