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 last Tuesday, December 12. A week that showed how investors positioned themselves ahead of the FOMC meeting last Wednesday when Powell delivered his pivot towards rate cuts. The commodity sector continued to see heavy net selling by hedge funds, once again driven by the energy sector which saw bullish bets on WTI and Brent slump to a 12-year low.
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:
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.
The sector driving the weakness during this nine-week period has almost exclusively been the energy sector, down 21%, followed by a 3% drop across industrial metals, while precious metals and to a lesser extent the agriculture sector helped offset the losses with gains of 8% and 2% respectively.
These developments highlight an increasingly under owned asset class which has struggled in 2023 amid growth worries in China and the wider world, and a sharp rise in funding costs leading industries to reduced excess inventories. It also highlights a sector which given the right circumstances may see a strong recovery in 2024 once the technical and/or fundamental outlook becomes more supportive, thereby leading to fresh buying and short covering from speculators. Drivers that may trigger such a change could be rate cuts lowering the funding costs and with that the inherent contango leading to industry restocking of inventories, OPEC maintaining a tight control of the supply of crude oil, and not least signs of tightness across key commodities that will help offset the risk of an economic slowdown across key economies.
Previous "Commitment of Traders" articles
Commodity articles:
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
