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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
COT: Specs in wind down mode as multiple uncertainties reign
Ole Hansen
Head of Commodity Strategy
Summary: This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, December 14. A week that encapsulated a market in wind down mode and preoccupied with the risk of hawkish FOMC meeting on December 15 and the rising threat of another virus-driven market disruption.
Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.
The weekly COT update is taking break and will return January 4.
The weekly COT update is taking break and will return January 4.
This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, December 14. A week that encapsulated a market preoccupied with the risk of hawkish FOMC meeting on December 15 and the rising threat of another virus-driven market disruption. Responding to these developments stock markets weakened, the dollar rose and bond yields drifted lower. Commodities traded lower as well with broad weakness seen across all sectors.
Commodities:
Ahead of last Wednesday’s FOMC meeting, and raised concerns the Federal Reserve would deliver a hawkish tilt, money managers opted to cut further their exposure across the five metals contracts. The selling was led by gold and silver while the net-short in palladium rose to a record high at 3,209 lots. Additional selling in HG copper reduced the net long to just 12k lots, an 18-month low.
In energy, the combined WTI and Brent crude oil long continued to be reduced, and following two months of almost continued selling the net length has seen a 38% reduction to 400k lots, a 13-month low. The latest change primarily driven by a 14.7k lots reduction in the WTI long driven by equal measures of long liquidation and fresh short selling.
The agriculture sector speculative length received a 41k lots boost to 948k lots with net buying of corn, sugar and cocoa more than offsetting selling in soybean oil and Chicago wheat, the latter seeing a return to a net short for the sixth time this year.
Forex
In forex, the focus among speculators was for a second week primarily geared towards reducing exposure, both long and short, thereby potentially reducing the signal value. Overall, the combined dollar long against ten IMM currency futures and the Dollar index was reduced for a second week, but this time only by 2% to $22.7 billion. Flows were mixed with selling of EUR, GBP and NZD being more than offset by demand for CHF, JPY and MXN.
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
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