Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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 July 12. A week where financial markets nervously awaited the US CPI print on July 13 and with that a guide for the pace of future rate hikes. Commodities' steadied following the recent slump with continued losses in metals and softs being offset by gains in energy, primarily natural gas, and grains.
This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to July 12. A week where financial markets nervously awaited the US CPI print on July 13 and with that a guide for the pace of future rate hikes. The S&P 500 and Nasdaq traded a tad softer with focus on corporate earnings and the inflation report, the latter driving US treasury yields higher while the dollar rose by 1.2% against a basket of major currencies. Commodities' steadied following the recent slump with continued losses in metals and softs being offset by gains in energy, primarily natural gas, and grains.
The exodus out of commodities which gathered pace following the early June US CPI shock and subsequent 0.75% rate hike from the FOMC, finally started to show signs of easing. The Bloomberg Commodity spot index traded flat during the reporting week with continued losses in metals, both industrial and precious, as well as softs led by coffee and cotton being offset by gains in energy (natural gas) and grains.
Responding to these developments speculators and hedge funds selling showed signs of slowing. The net long across the 24 major commodity futures tracked in this dropped to 900,000 contracts, the lowest since June 2020 but the 52k contracts of reduction was well below the 190k average seen during the previous four weeks. Speculators turned net buyers of crude oil, copper and sugar with selling concentrated in natural gas, soybeans, corn, wheat and coffee. The gross position i.e., the combined long and short was cut by 177k contracts, reflecting a continued high degree of uncertainty and the vacation season lowering the general level of risk appetite.
Soft commodities were mixed with buyers returning to sugar for the first time in seven weeks while cotton’s recent slump on the outlook for lower demand for fibers, especially in China, saw the net long being cut to a 13-month low. The Arabica coffee long saw a 29% reduction in response to a 7% price drop as speculators betting on tight Brazil supply started to surrender longs on a challenging global demand outlook.
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: