Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Broad buying momentum persists, led by Brent, copper, and grains
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 to last Tuesday, 1 October.
- Heavy selling of EUR and strong buying of AUD the main developements in a week that saw speculators scale back their dollar short
- Another positive week for the commodities sector saw broad demand with speculators focusing primarily on Brent crude, grains, sugar and live cattle
- Rising food prices last month helped trigger very aggressive buying across the agriculture sector, led by short covering in grains and soybeans
Forex:
Speculators scaled back their dollar short against eight IMM futures during a reporting week that saw heightened geopolitical tensions following Iran’s missile strike against Israel, US economic data strength, China releasing a mini-bazooka, and European CPI falling below 2% for the first time in three years. Overall, these events triggered heavy selling of EUR and strong buying of AUD, and by the end of last Tuesday, the dollar short had been reduced by USD 1 billion to USD 13.62 billion.
The AUD position flipped to a 14.5k net long from 40k short just two weeks prior, before several stimuli were announced, while, as mentioned, the prospect of the ECB stepping up its rate-cutting pace helped send the EUR lower, resulting in a 23% reduction in the net long. The JPY saw net selling for the first time in thirteen weeks as USDJPY showed signs of rolling over, with US rate cut optimism fading amid strong US economic data, and Japan’s ruling LD party surprisingly picked Ishiba to be its next leader.
Commodities:
In the latest reporting week to 1 October, the Bloomberg Commodity Index continued to build on the strong gains seen the previous week, with the 1.2% gain being led by industrial metals on China demand hopes and continued short covering across the agriculture sector, especially grains, on weather worries and China demand optimism. While the Iranian missile attack happened last Tuesday, the impact on prices and positioning was only seen in the following days.
Overall, the combined net long across the 27 major futures contracts tracked in this jumped 40% to 882k contracts, an 11-month high, with the main contributors being Brent crude, grains, sugar, and live cattle, while selling was limited to a few contracts led by WTI crude, gold, and silver.
Rising food prices fuel fund short-covering
Last month, global food prices, according to the UN FAO, jumped 3%, the most since March 2022, with rising prices seen across all five categories, led by a 10.4% increase in sugar, followed by vegetable oils (+4.6%) and dairy (+3.8%), while cereals, which among others include wheat, corn, and rice, rose by +3%. Overall, the global food price index, which has risen 2.15% in the last year, remains 22.4% below the March 2022 record peak that was reached following Russia’s attack on Ukraine.
The BCOM Agriculture Total Return Index, which tracks 11 major futures contracts across grains, softs, and livestock, rose 12% during a six-week period to 1 October. Responding to, and driving this move were hedge funds as they flipped a massive 539k contract net short to a 293k net long, the bulk of the change being driven by strong buying across the grains and oilseeds contracts, resulting in the net position returning to neutral for the first time in 13 months.
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:
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
30 Aug 2024: Commodities sector eyes fourth weekly gain amid softer dollar and Fed expectations
27 Aug 2024: Month-long sugar slide pauses amid concerns of Brazil's supply
27 Aug 2024: Libya supply disruptions propel crude prices higher
26 Aug 2024: COT: Funds boost metals investment as dollar long positions halve amid weakness
23 Aug 2024: Commodities Weekly: Metal strength counterbalancing energy and grains
22 Aug 2024: Persistent supply contraints keep cocoa prices elevated
21 Aug 2024: Weak demand focus steers crude towards key support
19 Aug 2024: Resilient gold bulls drive price to fresh record above USD 2500
19 Aug 2024: COT Buyers return to crude as gold stays strong; Historic yen buying
16 Aug 2024: Commodities weekly: Gold strong as China weakness drags on other markets
9 Aug 2024: Commodities weekly: Calm returns to markets, including raw materials
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