Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Summary: Our weekly Commitment of Traders update highlights futures positions and changes made by hedge funds and other speculators across commodities and forex during the week to last Tuesday, February 13. A week that saw global equities take a breather while bond yields and the dollar spiked after hotter-than-expected US inflation data dealt a blow to Fed rate cut hopes. In commodities, the metal sector sold off on the back of this, thereby joining ongoing weakness across the grains sector, while renewed strength returned to energy with softs continuing higher. We take a closer look at gold and discuss the yellow metals ongoing ability to withstand heavy selling in ETFs and futures
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:
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.
This summary highlights futures positions and changes made by hedge funds across commodities and forex in the week to last Tuesday, February 13. A week that saw global equities take a breather while bond yields and the dollar spiked after hotter-than-expected US inflation data dealt a blow to Fed rate cut hopes, forcing the market to price a delay of the first as well as revising lower the number of subsequent cuts. In commodities, the metal sector sold off on the back of this, thereby joining ongoing weakness across the grains sector, while renewed strength returned to energy with softs continuing higher.
The Bloomberg Commodity index, which tracks a basket of 24 major futures markets split between energy (30.1%), metals (34.2%) and agriculture (35.7%), lost 0.4% during the reporting period, primarily due to losses across the metals sector after the stronger than expected US inflation print raised doubts about the timing and depth of incoming US rate cuts. The grains sector continued to be challenged by ample supply and bulging global stocks, with the Bloomberg Grains index falling to a fresh three-year low.
Partly offsetting these developments, the softs sector continued higher, with tight supply supporting all four futures markets, not least cocoa, which continued its recent parabolic rise. Elsewhere, the energy market traded mixed with strong rallies across crude oil and fuel products being partly offset by a 16% natural gas slump.
The precious metal market, led by gold, started the year on a high note following a strong Q4-23 when the Fed focus finally turned from rate hikes to cuts. However, since then resilient economic data have driven down expectations for future rate cuts while delaying the timing of the first until mid-year. At the end of the latest reporting week to February 13, gold traded down only 3.4% on the year, a muted response to a +3% stronger dollar, a 44 bps rise in US 10-year Treasury yields and expectations for 2024 rate cuts almost reduced by 75 basis points.
Investors in so-called ‘paper’ gold: being exchange-traded funds and money managers in futures have as expected responded to these challenges. Since late December total ETF holdings saw a 2.6 million ounce reduction to 82.9 million, a four-year low while money managers such as hedge funds and CTA’s, often responding to short-term technical developments, cut their futures net long by 8.9 million ounces or 6.6% to 4.64 million (46,400 futures contracts), a four-month low.
The fact gold has ‘only’ lost the mentioned percentage despite the stronger dollar, a pickup in bond yields and reduced rate cut expectations is likely to have been driven by geopolitical concerns related to tensions in the Middle East, and not least continued strong demand for physical gold from central banks and China’s middle class attempting to preserve their dwindling fortunes caused by the property market crisis and one of the world’s worst performing stock markets as well as a weakening yuan. Ahead of the Chinese New Year holiday last week, the World Gold Council reported wholesale gold demand in China had seen its strongest January ever with 271 tons (9.6 million ounces) bought while the PBoC reported the 15th consecutive gold purchase in January, adding 10 tons to their gold reserves lifting the total to 2,245 tons.
Commodity articles:
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
30 Jan 2024: Gold and silver look to FOMC for direction
29 Jan 2024: Video: Unpacking the reasons behind soaring coffee prices
26 Jan 2024: Commodity weekly: Back in black supported by China stimulus
25 Jan 2024: Grains up on short covering; softs supported by tight supply
24 Jan 2024: Disruption risks drive specs into Brent; distorted EIA report up next
23 Jan 2024: Silver and copper in focus after recent declines
19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
Previous "Commitment of Traders" articles
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand