Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT Report: Limited dollar demand despite continued strength; Accelerated metals selling led by gold
Ole Hansen
Head of Commodity Strategy
Key points:
- Our weekly Commitment of Traders update highlights futures positions and changes made by hedge funds across forex and commodities during the week leading up to last Tuesday, 12 November
- Remarkably, the gross USD long versus eight IMM futures remained unchanged at USD 17.5 billion, potentially highlighting a cautious market stance on further USD gains.
- In the latest reporting week, the Bloomberg Commodity Index lost 2.2%, amid a similar rally in the dollar, driving accelerated long liquidation across precious and industrial metals, as well as crude oil.
- A five-fold increase in the corn long helped support only the second grains and oilseeds net long in more than a year
Forex:
Flows were unexpectedly mixed during a week when the USD surged over 2%, driven by investor concerns about impending tariffs, trade wars, and rising bond yields. These factors forced a recalibration of US rate cut expectations, boosting the greenback amid widening interest rate differentials.
The hardest-hit currencies were the euro and the Mexican peso, both losing around 2.8%. Despite the USD’s strength, speculative positioning showed mixed responses. Remarkably, the gross USD long versus eight IMM futures remained unchanged at USD 17.5 billion, potentially highlighting a cautious market stance on further USD gains after the broad-focused Bloomberg Dollar Index reached a two-year high.
This stability stemmed from speculators covering short positions in the euro and sterling, reducing overall short exposure by USD 1.9 billion and USD 0.9 billion, respectively. Conversely, most of the net selling pressure focused on the Japanese yen and the Canadian dollar. Notably, the Dollar Index flipped to a net short position of 2,322 contracts—a level not seen since March 2021—highlighting the mentioned caution.
Commodities:
In the latest reporting week, the Bloomberg Commodity Index lost 2.2%, with precious and industrial metals experiencing the largest losses. These were driven by a 2.1% gain in the USD and concerns about the impact of a trade war with tariffs on demand for key industrial metals, particularly in China. Growth concerns, ample supply, and dollar strength led to crude and fuel product weakness—albeit to a much lesser degree than metals—while natural gas rallied strongly due to increased demand and falling production. The agriculture sector traded mixed, with a small loss in grains offset by continued demand for softs and livestock.
Managed money accounts, from hedge funds to CTAs, responded to these developments by becoming relatively aggressive sellers of metals, led by gold, silver, and copper. This was primarily driven by long liquidation, while increased short selling contributed to a reduction in WTI and Brent crude oil net longs. Grains saw a five-fold increase in the corn long, wheat selling accelerated, and a rotation continued between out-of-favour soymeal and in-demand soy oil. Strong cocoa and coffee gains supported the accumulation of fresh longs, while net longs across all three livestock contracts reached new one-year highs.
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:
1 Nov 2024: Commodity weekly: Some weakness seen ahead of critical week
31 Oct 2024: Crude prices seek stability ahead of key support and US elections
30 Oct 2024: Will the US election result spark a gold correction?
29 Oct 2024: Podcast: Electrification's surge impact on commodities and equities
28 Oct 2024: COT: Crude length cut; silver and platinum see strong demand
25 Oct 2024: Commodity weekly: Market jitters on the rise ahead of U.S. elections
23 Oct 2024: Crude prices stalled by two-sided market risks
22 Oct 2024: Gold and silver's remarkable run in four charts
22 Oct 2024: Podcast: The Trump trade enters the metal market
21 Oct 2024: COT: Dollar shorts squeezed; Shift in commodity exposure from energy to metals
18 Oct 2024: Commodity weekly: Gold's record-breaking run continues
17 Oct 2024: Copper prices decline amid doubts about China stimulus impact
16 Oct 2024: How high can gold and silver rally?
8 Oct 2024: Podcast: Navigating market shifts: Fed rate cuts, commodities and rising food prices
8 Oct 2024: Video: These commodities might be impacted by the US election
7 Oct 2024: Crude oil surge caps strong four-week rally for commodities
7 Oct 2024: COT: Broad buying momentum persists, led by Brent, copper and grains
2 Oct 2024: Q3 2024 Commodity Outlook: Gold and silver continue to shine bright
30 Sept 2024: COT: Fed and PBOC trigger largest weeklyl surge in commodities demand in a decade
27 Sept 2024: Commodity weekly: Industrial metals gain strength during a week of crude weakness
26 Sept 2024: Crude prices drop again as Saudi and Libya supply concerns grow
24 Sept 2024: Fed and PBOC add momentum to commodities market rebound
23 Sept 2024: COT: Dollar short reduced; Investment metals see strong demand ahead of FOMC
20 Sept 2024: Commodity weekly: Commodities boosted by bumper rate cut
20 Sept 2024 Video: Gold or silver, which metal will perform the best
17 Sept 2024: With gold reaching new heights, silver shows potential
16 Sept 2024: COT: Record short Brent and gas oil positions add upside risks to energy
11 Sept 2024: Crude slumps amid technical selling and recession fears
10 Sept 2024: US Election: will gold win in all scenarios
9 Sept 2024: COT: Crude long cut to 12-year low; Dollar short more than doubling
5 Sept 2024: Can gold overcome the 'September curse'?
4 Sept 2024: Wheat rises on European crop worries
3 Sept 2024: Chinese economic woes drag down crude oil and copper
2 Sept 2024: COT: Commodities see broad demand as the USD slumps to a net short
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