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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
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COT: Funds cut metals exposure; Crude selling slows
Ole Hansen
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, May 16. A week where the US debt debacle and robust US economic data lifted the dollar and bond yields while sending commodities lower.
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
Global Market Quick Take Europe
Saxo Market Call Daily Podcast
This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to last Tuesday, May 16. A week where the US debt debacle and robust US economic data helped strengthen the dollar while bonds and stocks traded lower. These developments, especially the stronger dollar, drove another week of commodity sector weakness led by the metals sector, both precious and industrial.
Commodity sector:
The Bloomberg Commodity Index, which tracks a basket of major commodity futures spread evenly between energy, metals and agriculture, fell to a 16-month low with focus on China’s lackluster recovery and recession worries in Europe and the US. Apart from the softs sector which is being supported by an Asian heatwave lifting the prices of sugar, coffee and rice, all other sectors saw weakness led by industrial and precious metals. The energy and grains sectors traded mixed but lower overall on the week.
The continued weakness saw hedge funds cut bullish bets across 24 major commodities futures to near a three-year low at 698k lots, with the small 4k lot net reduction highlighting a more mixed reaction with selling of crude oil, gold, silver, copper and soybeans, being partly offset by demand for natural gas and fuel products as well corn, wheat and all four softs contracts.
Crude oil and fuel products: Continued weakness in crude oil helped attract additional long liquidation in Brent and fresh short selling in WTI, and overall, the net selling of 17.6k lots reduced the combined net long to 267k lots, near the post-banking crisis and pre-OPEC+ production cut low at 241k lots. Improved refiner margins meanwhile supported a 28% reduction in the gas oil net short from seven-year high to 20.6k lots while the ULSD flipped back to a 7k lots net long.
Gold and silver: The technical breakdown in silver, down 7.7% during the reporting week, helped trigger a halving of the net long to 13.4k lots while the break below $2000 in gold saw the first meaningful, albeit still moderate, amount of long liquidation in 10 weeks. The net long was reduced by 10% to 131k lots, with one-third of the change being driven by fresh short positions.
HG Copper: The 6% selloff back below the 200-day simple moving average, last at $3.80/lb helped drive a 40% increase in the net short to 22.6k lots, a ten-month high.
Grains and oilseeds: Heavy selling of soybeans, down 3.6% on the week, helped trigger a 51% reduction in the net long to 24k lots, an 18-month low, while a 10.5% slump in soybean oil lifted the net short to a four-year high at 36,4k lots. Overall, however, the sector saw a small amount of net buying led by corn, soybean meal and KCB wheat.
Softs: All four contracts tracked in this saw net buying from funds as the supply outlook for sugar, coffee and cocoa remains challenged by adverse weather developments, most notably an ongoing heatwave across Asia.
Forex
In forex, speculators somewhat surprisingly, continued to increase their gross dollar short, despite some emerging and broad greenback strength. Overall, the non-commercial dollar short versus nine IMM futures contracts and the Dollar index reached a two-year high at $15 billion. The biggest position, by far, remains the EUR long, and during the reporting week it reached a September 2020 high at 187k lots, or €23.4 billion equivalent. Digging a bit deeper, however, we find that the bulk of the increase was driven by traders reducing their gross short position as price began to drop. In other words, it would take a bigger correction than the one seen to around €1.0850 (Spot EURUSD) to trigger another wave of selling, this time through long liquidation.
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