Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Widespread commodity gains ignite fresh hedge fund demand
Ole Hansen
Head of Commodity Strategy
Summary: Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to Tuesday, June 6. Supported by a softer dollar it was a week that saw continued stock market gains and the VIX index slump to a post-pandemic low while bond yields held steady as the market tried to gauge the result of the upcoming FOMC meeting amid mixed macro-economic signals. A strong start to June helped lift the commodity sector, and with that the speculative interest across all sectors.
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 reasons why we focus primarily on the behavior of the highlighted groups 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
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This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to last Tuesday, June 6. Supported by a softer dollar it was a week that saw continued stock market gains and the VIX index slump to a post-pandemic low while bond yields held steady as the market tried to gauge the result of the upcoming FOMC meeting amid mixed macro-economic signals. A strong start to June helped lift the commodity sector, and with that the speculative interest across all sectors.
Commodity sector:
Money managers which include leveraged traders such as hedge funds and trend-following CTA’s remain key actors across the commodity market, and on a weekly basis the US CFTC (Commodity Futures Trading Commission) through its Commitment of Traders Report give insight to the positioning among this group of traders. Instead of causing them, this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy more often than not 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.
In the week to June 6, the Bloomberg Commodity Index climbed 2.1% as May weakness was replaced by early June strength driven by a softer dollar, speculation that the Chinese government may step up its support for the economy, hot and dry weather raising concerns across the agriculture sector and Saudi Arabia’s latest attempt to prop up the oil market. Gains were seen across all the major sectors led by livestock (+7%), grains (+4%) and energy (+2.2%).
Speculators, responding to these across-market gains, lifted their net long across 24 commodities by a combined 117k contracts to 775k, the biggest one-week addition in seven weeks. As per the table below just a handful of commodities saw net selling amid a broad recovery in risk appetite, with demand being led by crude oil, diesel products, gold, copper, and most agricultural commodities, led by soybeans, cattle, and hogs.
Crude oil and fuel products: The Saudi production cut and subsequent 3% rally helped lift the WTI and Brent combined crude oil long by the most in nine weeks, with the main drivers behind the 30k contract increase to 301.5k being fresh longs in Brent and short covering in WTI. Gas oil and Ny Harbor ULSD, both diesel related contracts saw demand while speculators flipped their natural gas back after holding a net long for the past four weeks.
Gold, silver and copper: gold buyers returned after four weeks of net selling to lift their net long by 6% to 114k contracts, some 34k contracts below the May peak. A recovery in copper prices from support at $3.55 helped drive a 52% reduction in the net-short to 12k contracts, the lowest conviction in lower prices in six weeks. Silver and platinum both seeing a small amount of length being added.
Grains: A 4% jump in the Bloomberg Commodity Softs index helped drive fresh demand for soybeans and short covering in corn and CBOT wheat. Overall, the total net short across the six contracts tracked in this saw a 50k reduction to -95k contracts, a six-week low. The bulk of the buying being led by the soybeans complex
Softs: A second week of long liquidation saw the sugar net long cut by 5% to 195k contracts while new longs lifted the cocoa net long by 10% to a fresh three-year high at 58k contracts. Coffee length increased amid a reduction in the gross short while the cotton long more than doubled to 4k contracts.
Livestock: Record high cattle prices lifted the live cattle net long to a four-year high at 115k contracts while the less traded Feeder cattle contract saw its net long reach a six-year high at 18k contracts. In lean hogs speculators responded to a 7% rally by halving what was a record short in the previous week.
Forex
In forex, speculators cut their IMM dollar short against nine IMM futures by 31% to just $7.5 billion, a nine-week low and half the mid-May peak at $15 billion. Selling was broad and led by EUR, JPY, AUD & CAD with MXN being the exception. It is worth noting how the dollar short is concentrated against the euro ($21.2 billion equivalent), and less so against the Mexican peso ($2.3bn) and Sterling ($1 bn) while the dollar is traded from a long perspective against the Japanese yen ($9.4bn), Aussie dollar ($3.8bn) and Canadian dollar ($2.9bn).
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