Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Crude oil long jumps the most since 2020
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, January 17. A week that saw continued dollar weakness attract fresh selling from speculators while a strong rally in the Bloomberg Commodity Index on China demand optimism helped lift longs across all sectors, not least in crude oil, copper, gold, corn and soybeans. Wheat, coffee and natural gas remain the most shorted contracts leaving them exposed to an upside reaction should the technical and/or fundamental outlook turn more price friendly.
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 last Tuesday, January 17. A week that saw strong gains across stocks with focus on the incoming earnings season, and a dollar touching a nine-month low as bond yields continued to ease with traders increasingly looking for a one-and-done rate hike from the U.S. Federal Reserve. The Bloomberg commodity index (BCOM) meanwhile rallied strongly with gains seen across all sectors on China demand optimism.
Commodities
The commodity sector saw strong gains led by crude oil and fuel products as well as copper on continued optimism that demand in China, the world’s biggest consumer of raw materials, will increase as focus switch from lockdowns to recovery. In addition, dollar and yield softness added continued support to investment metals led by gold, while a recent WASDE report provided fresh support and demand for corn and soybeans. Selling was primarily concentrated in natural gas on mild weather, platinum, coffee and cotton.
Energy
Crude oil’s 7% rally during the reporting week was supported by a strong pickup in demand from hedge funds. The result being a combined 81k contract jump in the Brent (55k) and WTI (26k) net longs to 395k contacts, a nine-week high and biggest weekly jump since April 2020 when buyers had started to return following the global lockdown slump. However, with most of the increase being driven by short covering (45k) as opposed to fresh longs (36k) traders have yet to fully embrace the prospect of even higher prices, potentially attracting more buying in the short term as traders continue to add length. Strong gains across the gasoline and distillate contracts primarily triggered a reaction in gasoil which saw its net long rise 21% to 70.3k contracts.Metals
Gold’s continued rally, this reporting week by 1.8%, helped attract continued demand and short covering from hedge funds. A seventh consecutive week of buying saw the net long rise by 11k contracts to 93.3k contracts, a nine-month high. Silver, which despite support from a weaker dollar and rising industrial metal prices only saw 3.4 contracts being added, bringing the net long to 28k contracts.
Copper, one of the best performing commodities this month, attracted another 6.5k contracts of buying, lifting the net long to a nine-month high at 35.2 contract. The last two weeks have seen the strongest accumulation of length by funds since October 2021 and while China provides the fundamental reason for buying, the positive price action has also fed a great deal of speculative momentum buying. The PGM’s meanwhile saw net selling as prices of both platinum and palladium fell. The net long in platinum slumped by 31% to 16.9k contacts as the discount to gold raced higher to reach 865 dollars, compared with 750 at the start of the year.
Agriculture
The impact of the January 10 World Agriculture Supply and Demand Estimate report (WASDE), which showed support for corn and soybeans, helped lift the BCOM Grains Index by 4.1% during the week to January 17. With gains primarily being driven by soybeans and corn, those longs received a strong boost; soybeans by 28% to 168k contracts and corn by 28% to 192k.
In a week where prices of the Chicago and Kansas wheat contracts rose by 2.8% and 5.4% respectively, funds continued to sell into those gains. Chicago wheat together with Arabica coffee together with US natural gasare now the two most shorted commodities. Representing a nominal value of around $2.4 billion, the wheat short at 65k was the most elevated since May 2019 while in coffee the 40.5k contract – a 34% jump on the week – was the highest since November 2019.
Another soft commodity that increasingly has fallen out of favor among funds is cotton, which during the reporting week saw a 2.3% price drop drive 11k lots of net selling, resulting in the net flipping to a net short of 2k lots for the first time since May 2020.
Forex:
In forex, the U.S Dollar Index (DXY) reached a nine-month low as broad selling of the greenback continued. Speculators meanwhile responded mixed to this development but overall, the gross short against nine IMM forex futures and the Dollar Index rose 23% to $5.7 billion, with buying of JPY, GBP and CAD more than offsetting a week that saw profit taking emerge in the euro.
Ahead of last Wednesday’s Bank of Japan meeting, the Japanese yen net short was cut by 12.4k contracts (One contract equals ¥12.5 million) to just 23k lots, a 22-month low and a 78% reduction from the late October peak above 100k lots. The EURUSD reached a nine-month high, but several days of failing to break above€108.75 probably helped trigger some light profit reducing the net long by 8k lots (One contract equals €125,000) to 127k contracts.
The U.S. Dollar Index meanwhile has seen almost continued long liquidation since hitting a five-year high last June at 45k contracts (One contract equals $1000 times the index value). During the latest reporting week, the net length was reduced further to just 13k contracts, an 18-month low.
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