Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Crude longs slump; grain purchases surge
Ole Hansen
Head of Commodity Strategy
Key points:
- Commitment of Traders report highlighting futures positions and changes made by speculators across forex and commodities during the week to May 7
- Crude longs cut at the fastests weekly pace since March 2023, natural gas flips back to a net long
- Grains see biggest week of short covering since 2017, led by corn and soybeans
COT on forex
Dollar weakness triggered a second week of net selling with the gross dollar long against eight IMM currency futures down by one-quarter during this time to USD 24.7 billion. Major contributors were fresh demand for EUR, flipping the position back to a net long, together with continued short covering in JPY and AUD.
COT on Commodities
The latest Commitment of Traders (COT) report, covering the week ending 7 May, saw two major themes emerge in a week where the sector as a whole recorded gains. The energy sector saw continued selling (long liquidation) leading to technical selling of the crude and fuel contracts, while natural gas attracted fresh demand. The biggest changes occurred in grains which saw increasingly aggressive short covering amid a continued rally driven by worries about weather-related crop losses of wheat in top exporter Russia, flooding impacting soybeans in southern Brazil, as well as concerns over the slow pace of US corn planting.
During the week, the Bloomberg Commodity Total Return Index rose 1% with gains in precious metals (+1.5%) and not least grains (+5.8%) being partly offset by losses in energy (-1.4%) and softs (-3.6%). On an individual level, selling was concentrated in crude oil, gas oil, RBOB gasoline as well as most softs led by coffee and cotton, while buyers concentrated their efforts in natural gas, platinum, and not least soybeans and corn.
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 main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's 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
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.
Recent commodity articles:
8 May 2024: Fund selling exacerbates softening crude outlook
8 May 2024: Grains see bumpy start to 2024 crop year
6 May 2024: COT: Commodities correction spurs muted selling response
3 May 2024: Commodity weekly: Grains boost, correction in softs and energy
2 May 2024: Copper's momentum-fueled rally halts amid weakening fundamentals
29 April 2024: COT: Gold bulls stand firm despite recent correction
26 April 2024: Commodity weekly: Sticky inflation and adverse weather focus
23 April 2024: What drives the gold and silver correction ?
22 April 2024: COT: Declining momentum may signal shift toward consolidation
19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
15 April 2024:COT: Hedge funds propel multiple commodities positions beyond one-year highs
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
8 April 2024:COT: Speculative interest in metals and energy gain momentum
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
2 Apr 2024:COT: Gold and crude longs maintained amid strong underlying support
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