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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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COT: Gold and silver bought; dollar sold ahead of FOMC
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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 Tuesday, December 13. A week that saw a weaker than expected US CPI print boost risk sentiment across markets, just ahead of last Wednesday’s hawkish FOMC meeting. The dollar short hit a 17-month high while all but a couple of commodities rose, led by natural gas, gold, silver and soybeans
Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities while in forex we use the broader measure called non-commercial.
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
Financial Markets Daily Quick Take
Saxo Market Call Daily Podcast
This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to Tuesday, December 13. A week that saw a weaker than expected US CPI print boost risk sentiment across markets, just ahead of last Wednesday’s hawkish FOMC meeting. Before then stocks rallied, and the dollar dropped to a fresh low for the cycle. Bonds held steady while the Bloomberg Commodity index jumped 4.5% with gains seen across most futures markets.
Commodities
The commodity sector traded sharply higher on the week with the Bloomberg Commodity Index jumping 4.5% as gains were recorded across all but two of the 24 commodity futures tracked in this update. Most notable gain was the energy sector, led by a near 27% jump in US natural gas while investment metals had a good week with the net long in gold and silver jumping by 50%.
Overall, the net long across 24 commodity futures rose 9% to 1.11 million contracts representing a notional value of $71 billion. Speculator buying was concentrated in natural gas, gold, silver, soybeans, corn and cocoa.
Energy
For a second week the COT report showed a divergence between WTI where 4.4k lots were net bought and Brent suffered a 5.6k lot reduction in the net long to 89.4k lots, a 26-month low. Length across the fuel products saw a net reduction with speculators adding fresh short position as prices moved higher. An emerging cold front across the US supported a near 27% price jump, driving a halving of the net short position to 34.5k lots.Quick Take comment: Crude oil (CLF3 & LCOG3) prices advance on China’s growth push and US refilling SPR Oil prices started the week on a firmer footing, with WTI rising towards the $75/barrel mark and Brent heading back towards $80. While there are unconfirmed reports of massive number of cases and fatalities in China from the spread of Covid, the government’s official message continues to stress upon the need to expand consumption as the key economic priority for 2023. This helps paint a better demand outlook for oil, as global demand slowdown concerns continue to mount in the US and Europe and Russian flows show no signs of slowing. Moreover, it was reported that the US is starting to replenish the Strategic Petroleum Reserve (SPR), starting with a 3-million barrel, fixed-price purchase. In week to Dec 13 funds cut bullish Brent and WTI bets to lowest since April 2020.
Metals
Money managers loaded up on metals during a week that saw the dollar hit a fresh cycle low after another weaker-than-expected CPI surprise. The net long in both gold and silver jumped by 50%, the platinum long rose 19% while copper held steady.
Quick Take comment: Gold (XAUUSD) trades near $1800 as it continues to find support. Since the current run up in gold started in early November, the price has not dipped below its 21-day moving average, today at $1775. Speculators increased bullish gold and silver bets by 50% in the week to December 13 when prices briefly spiked in response to a softer dollar and CPI print. The subsequent setback following Wednesday’s hawkish FOMC, however, was not big enough to rattle recent established longs. For that to happen the price in our opinion as a minimum need to break below $1765. The risk of a recession and the FOMC hiking into economic weakness – potentially without succeeding getting inflation under control - continues to strengthen the upside risk for investment metals in 2023.
Agriculture
The grains sector saw buyers return following a big drop in the net long the previous week. Buying was concentrated in soybeans and soybean meal and corn, the latter following the biggest one-week reduction since March 2019. Softs saw buyers return to coffee, the cocoa position flip back to a net long and a 41% reduction in the cotton net long.
Forex
Pre-FOMC dollar weakness driven by a softer than expected US CPI saw speculators increase their dollar short against nine IMM futures to $1.5 billion, a 17-month high. Selling of CAD was more than offset by AUD, GBP and not least JPY short covering. Latest Market Insights
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