Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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COT: Commodity selling pressures showing signs of easing
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 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.
Saxo Bank publishes 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.
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.
Commodities
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.
Energy
Speculators turned net buyers of crude oil for the first time in five weeks with short covering emerging after Brent and WTI both slumped below $100 on growth and demand fears. Following four weeks of selling, which reduced the net long by 170k contracts to 344k contracts, lowest since March 2020, the net long rose by 11k contracts with selling of Brent (3.4k) being more than offset by fresh demand for WTI (+14.3k).Latest market developments: WTI and Brent crude oil futures trade higher after President Biden, as expected, left the Middle East with no promise of additional barrels to help suppress record high US gasoline prices. Instead, Saudi ministers said that oil policy decisions will be taken based on market moves and within the framework of the OPEC+. According to the current OPEC+ agreement, the four Gulf countries and OPEC members that participated in the meeting can boost production by around 1 million barrels per day by the end of next month. Libya meanwhile has said plans to restart all its oil exports and production as a recent blockade looks set to be lifted. Gasoline prices have eased recently on a combination of lower oil prices and lower refinery margins (crack spreads). The same goes for diesel although last week saw the crack spreads move higher again, highlighting a continued tightness.
Gold, silver, platinum and copper
Speculators exodus from Invesment and semi-precious metals continued at a rapid pace last week, resulting in the biggest net short since May 2019. The gold net long was cut by 24k contracts close to neutral at 3k, the lowest level of investor participation on the long side since March 2019. Silver and platinum both saw additional selling with their respective short positions both rising to levels not seen since June 2019. Copper stood out with short covering, despite continued price weakness, reducing the net short by 31% to 18.3k contracts.Latest market developments: Gold has bounced back after twice finding support in the $1700-area last week, supported by profit taking on long dollar positions ahead of Thursday’s ECB meeting which is expected to yield the first-rate hike since 2011. Easing selling pressure from speculators also expected after 24k lots selling in the week to July 12 brought the net back to neutral. Increased short positions in silver and platinum also reflecting the latest onslaught with a change in the technical and or fundamental outlook potentially supporting a rebound on short covering.
HG copper found support at $3.15/lb last week, a key level representing a 61.8% retracement of the 2020 to 2022 rally. The recovery seen this Monday has been driven by support from Chinese authorities, a weaker dollar and a market generally oversold. For this to become more than a bear-market bounce the price as a minimum need to retrace back above $3.68/lb.
Agriculture
Weeks of heavy selling have reduced the total net long across 13 major agriculture futures to a near two-year low at 498k contracts split between grains (344k), softs (102k) and livestock (52k). Last week speculators, despite higher prices, continued to cut their exposure in grains and soybeans. The 58% reduction from a 10-year high above 800k contracts reached just three months ago has been a major driver behind the 28% price slump in the Bloomberg Grains index during this period. While the bulk of the reduction has been driven by corn, the market has in addition turned net short CBOT wheat for the first time since February, thereby removing Ukraine war premium.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.
Forex
Speculators increased their bullish dollar bets against nine IMM futures contracts and the Dollar index by a modest 7% to $21.3 billion. This during a week where the greenback reached multi-decade highs against the yen and the euro, with the latter reaching parity. The selling of the euro took to the net short to a 28-month high at 25.2k contracts. 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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