Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Oil, copper and soybeans sold into the virus storm
Ole Hansen
Head of Commodity Strategy
Summary: Commodities many of which derive a major part of their demand from China, the worlds second largest economy, have witnessed a brutal couple of weeks. During the week to January 28 all but a few of the 24 commodities we track in this report were sold. Hardest hit were crude oil, fuel products, copper, soybeans and cattle.
Saxo Bank publishes two 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.
Last week’s report highlights positions and changes made by hedge funds across key commodities during a period where the death toll from the China-born coronavirus continued to rise and infections accelerated. With more than two-thirds of China’s economy staying closed this coming week the economic fallout continues to reverberate through the financial markets.
Not least commodities many of which derive a major part of their demand from China, the world’s second largest economy. During the week to January 28 all but a few of the 24 commodities we track in this report were sold. Biggest reductions were seen in crude oil and fuel products, copper, soybeans and cattle.
Brent and WTI crude oil which both slumped by close to 8% during the reporting week, saw a combined reduction in the fund long by 83k lots to 578k lots. It is worth noting that this exposure is still double compared with last October when Brent hit a closing low at $57.70/b (It closed at $56.60/b on Friday).
Other commodities have responded favorably to overnight news from China that the Peoples Bank of China in order to cushion the economy and plunging domestic markets have cut interest rates while providing short-term funding to its banks. Crude oil however continues to struggle with a report from Bloomberg pointing to a 20% or 3 million barrels/day drop in Chinese demand. If confirmed this will undoubtedly become the biggest demand shock since the 2008-09 global financial crisis. With this in mind the market will keep a close eye on OPEC this week for signs of price support through additional measures to curb supply.
Gold and silver struggled most of the reporting week to receive a safe-haven bid with investors instead talking cover in secure government bonds. As a result long positions in both were cut. While the reduction in gold was a small 1.5k lots or 1% the reduction in silver longs was somewhat bigger. The 9.1k lots, or 15% reduction, was due to its link to industrial metals. Silver derives around 50% of its demand from industrial use.
As a gauge for the virus spread and impact HG copper has been caught in the eye of the storm. The 7.7% price slump during the week to January 28 triggered selling of 27k lots. This resulted in the fund position flipping to a net-short of 20k lots, an eight-week high. Still well below the record 75k lots short seen last August when just like now the key support level at $2.5/lb was being challenged. Back then if was caused by heightened trade war angst.
Three weeks of selling has taken Chicago soybean futures down by close to nine percent and last week funds sold 37k lots which increased the net short to 51k lots. Excitement following the U.S. – China trade deal has faded fast. This has generally resulted in a challenging January for U.S. farm products on a diminishing belief that China will or can deliver the promised pickup in demand for U.S. agriculture products.
Soft commodities were mixed with sugar, cocoa and cotton all being bought while the dramatic and continued coffee price slump drove a 37% reduction in the still net long to 19k lots
What is the Commitments of Traders report?
The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.
In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.
In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.
Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.
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.
The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.
In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.
In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.
Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.
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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