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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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COT: Oil and gold sold; Ag sector boosted by continued short covering
Ole Hansen
Head of Commodity Strategy
Summary: Hedge funds sold energy and metals on stronger dollar, demand worries and reduced geopolitical risks. Grains bought on lower than expected stockpile and softs on emerging supply worries.
Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.
Speculators cut bullish bets across 24 major commodity futures by one quarter to 265k lots in the week to October 1. A stronger dollar combined with demand worries and a reduced geopolitical risks helped attract sellers to energy and metals while continued short-covering supported the three agriculture sectors of grains, softs and livestock.
The biggest changes on a relative basis were cocoa and sugar buying and gold selling.
The combined net-long in WTI and Brent crude oil slumped by 17% to 389k lots, an eight-month low. This as the economic growth cloud darkened and the risk premium following the Saudi Aramco attack was wiped out. The net-long in WTI plunged by 32%, the most since August 2017, with longs being cut and fresh shorts added.
The overriding focus this week will be the resumption of U.S. - China talks on Thursday, not least after China over the weekend signaled a reluctance to agree to a comprehensive trade deal. While growth and demand worries knocked 5.5% off the price last week, traders may be reluctant to drive the price lower at this stage with geo-politcal risks still elevated.
- Lack of progress of resolving tensions in the Middle East between Saudi Arabia and Iran
- Turkish forces stand ready to invade northern Syria
- Anti-government protests in Iraq, Opec's second largest producer
The gold net-long was cut by 17% to 235k lots, the biggest weekly reduction since April. The change was in response to the technical break below key support at $1485/oz after stocks rallied and the Greenback strengthened. However, the limited addition of fresh short positions (+2.4k lots) point to lack of selling appetite despite the mentioned break.
HG copper selling continued after weak US manufacturing data added to worries about global growth. Platinum’s net-long was cut by one-third following the heavy price slump below $925.
Speculators bought 33k lots of both soybeans and corn after the USDA in its quarterly stock report saw stocks lower than what the trade had expected. Including wheat the sector net-short was 156k lots, not far from the seasonal average.
Speculators continued to play catch up with recent bullish developments in soft commodities. The net-short in sugar (+38k to -176k lots) was reduced further while funds finally managed to build a long in cocoa of 19k lots. This after supply concerns from West Africa helped drive a September rally of 15%.
What is the Commitments of Traders report?
The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.
In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.
In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.
Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.
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.
The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.
In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.
In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.
Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.
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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