Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Near record gold buying drives risk of correction
Ole Hansen
Head of Commodity Strategy
Summary: This summary highlights futures positions and changes made by hedge funds across commodities, forex and bonds in the week to last Tuesday, October 31. A week that concluded just ahead of Wednesday’s FOMC meeting when Fed Chair Powell sent a strong hint to the market that the Federal reserve is done hiking rates. His comments helped wrongfoot traders who during the reporting week had been focusing on markets plagued by geopolitical concerns, sharply rising Treasury yields and a strong dollar driving the risk of economic weakness. Three weeks of near record gold accumulation has left the metal exposed to a correction or best a period of consolidation.
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.
Commodity weekly: Green transformation trouble
Global Market Quick Take: Europe – 6 November, 2023
This summary highlights futures positions and changes made by hedge funds across commodities, forex and bonds in the week to last Tuesday, October 31. A week that concluded just ahead of last Wednesday’s FOMC meeting when Fed Chair Powell sent a strong hint to the market that the Federal reserve is done hiking rates. His comments helped wrongfoot traders who during the reporting week had been dealing with weak sentiment across markets, plagued by geopolitical concerns, sharply rising Treasury yields and a strong dollar driving the risk of economic weakness.
The commodity sector traded flat during the reporting period with gains in precious and industrial metals being offset by losses across the agriculture sector, while the energy sector was mixed with losses in crude and fuel being offset by strong gains in natural gas. On an individual basis some 14 out of the 24 major commodity futures tracked in this traded lower, led by crude oil and US fuel futures as softened demand helped deflated the geopolitical risk premium, together with broad weakness across the agriculture sector. Biggest risers on the week were natural gas, platinum, cocoa and the three livestock contracts.
Overall, these developments saw leveraged funds, such as hedge funds and CTA’s cut their overall exposure by 5% to 833 contracts representing a nominal value of $75 billion. Hardest hit were crude oil followed by corn and sugar while a sizable length was added to natural gas, gold, platinum, soybeans and coffee.
Commodity sector:
The commodity sector traded flat during the reporting period with gains in precious and industrial metals being offset by losses across the agriculture sector, while the energy sector was mixed with losses in crude and fuel being offset by strong gains in natural gas. On an individual basis some 14 out of the 24 major commodity futures tracked in this traded lower, led by crude oil and US fuel futures as softened demand helped deflated the geopolitical risk premium, together with broad weakness across the agriculture sector. Biggest risers on the week were natural gas, platinum, cocoa and the three livestock contracts.
Overall, these developments saw leveraged funds, such as hedge funds and CTA’s cut their overall exposure by 5% to 833 contracts representing a nominal value of $75 billion. Hardest hit were crude oil followed by corn and sugar while a sizable length was added to natural gas, gold, platinum, soybeans and coffee.
Note on gold: Hedge fund buying of gold extended to a third week with 15.7k lots lifting the total to 106k lots, a three-month high. The pace of buying (121k) in the past three weeks has only been exceeded once in the last 20 years, and while a relatively small net-long leaves plenty of room for additional buying, it nevertheless raises the risk of a correction or at best a period of consolidation. It also helps to explain why gold struggled to gain further momentum from the post-FOMC drop in Treasury yields and the dollar.
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