Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT Report: USD long jumps one-third; Mixed week in commodities
Ole Hansen
Head of Commodity Strategy
Key points:
- Our weekly Commitment of Traders update highlights futures positions and changes made by hedge funds across forex and commodities during the week to last Tuesday, 19 November
- The USD long against eight IMM futures jumped by one-third to a six-month on heightened Russia-Ukraine tensions.
- A mixed week in commodities with demand for Brent and fuel prodcucts, silver, cocoa and coffee being offset by selling in gold, soybeans, and cotton.
Forex:
In forex, speculators responded to heightened Russia–Ukraine tensions by lifting their combined USD long against eight IMM futures by one-third to a six-month high at USD 23.1 billion. Except for short covering in JPY, another haven currency, all other currencies saw net selling, including the Mexican peso, which had rallied 3% during the week. Selling was most pronounced in EUR, resulting in a 35,000-contract increase in the net short to 42,600 contracts, and followed by Sterling which saw a 15,700 contract reduction in the net long to 40,300 contracts.
With the dollar getting increasingly overbought last week, the risk of a reversal rose and it came to fruition overnight in Asia where the US dollar gapped lower in reaction to Trump’s choice of Scott Bessent for Treasury Secretary, with the move strongest versus CHF, JPY and the Euro. Bessent’s more moderate views on tariffs than some of the other choices and his views on reducing the deficit helped lower US yields, supporting the US dollar move. Whether it will be enough for the dollar to reverse course remains to be seen, not least considering elevated georisks, and the prospect of diverging rate cutting paths between the Federal Reserve compared with others, not least the ECB.
Commodities:
In the latest reporting week, the Bloomberg Commodity Index rose by 1.2%, with gains led by the energy sector, where crude and fuel products all rose. This was followed by precious metals, where prices for platinum and palladium recovered strongly, and gold stabilised ahead of a week that ended with the strongest weekly gain in 20 months. This gain was driven by fresh momentum buying supported by escalating tensions between Russia and the West. The agriculture sector traded mixed, with strong weather-related gains in cocoa and coffee offset by renewed selling across the soybean complex as well as cotton.
The response to these price developments from managed money accounts was relatively muted, with the overall exposure across the 27 major futures contracts tracked showing a small reduction. On an individual level, the strongest demand was seen in Brent, gas oil, gasoline, silver, cocoa, and coffee, while selling was concentrated in gold, soybeans, and cotton.
Today in Asia, markets responded with a risk-on move that saw the dollar and US Treasury yields trade lower and stocks move higher after US President-elect Donald Trump chose hedge fund billionaire Scott Bessent as Treasury Secretary. Bessent is known as a fiscal hawk and has advised Trump to create a “3-3-3" policy, including cutting the budget deficit by 3% of GDP by 2028, pushing GDP growth to 3% via deregulation, and pumping an extra 3 million barrels of oil per day. He has also expressed that tariffs should be used more as a negotiating tool and implemented gradually.
Commodities saw a mixed reaction to the news, with gold suffering a steep drop on reduced concerns about the US debt situation, thereby squeezing recently established long positions. Crude traded lower after Israel said it was nearing a ceasefire agreement with Hezbollah, while industrial metals traded higher, supported by a weaker dollar and Bessent’s more moderate views on tariffs.
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 main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's 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
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.
Recent commodity articles:
22 Nov 2024: Commodity weekly: Strongest performance since April
19 Nov 2024: Gold and silver rise on Russia-US tensions
18 Nov 2024: COT: Limited dollar demand despite strength; Acclerated metals selling
11 Nov 2024: COT: Speculators bought energy and grains, sold gold ahead of elections
8 Nov 2024: Commodity weekly: Mixed response to Trump 2.0
6 Nov 2024: Podcast: US election and the market reactions, including commodities
6 Nov 2024: Trump and Republican victories spark commodity decline
4 Nov 2024: COT: Speculators flock to dollars, exit commodities ahead of US election
1 Nov 2024: Commodity weekly: Some weakness seen ahead of critical week
31 Oct 2024: Crude prices seek stability ahead of key support and US elections
30 Oct 2024: Will the US election result spark a gold correction?
29 Oct 2024: Podcast: Electrification's surge impact on commodities and equities
28 Oct 2024: COT: Crude length cut; silver and platinum see strong demand
25 Oct 2024: Commodity weekly: Market jitters on the rise ahead of U.S. elections
23 Oct 2024: Crude prices stalled by two-sided market risks
22 Oct 2024: Gold and silver's remarkable run in four charts
22 Oct 2024: Podcast: The Trump trade enters the metal market
21 Oct 2024: COT: Dollar shorts squeezed; Shift in commodity exposure from energy to metals
18 Oct 2024: Commodity weekly: Gold's record-breaking run continues
17 Oct 2024: Copper prices decline amid doubts about China stimulus impact
16 Oct 2024: How high can gold and silver rally?
8 Oct 2024: Podcast: Navigating market shifts: Fed rate cuts, commodities and rising food prices
8 Oct 2024: Video: These commodities might be impacted by the US election
7 Oct 2024: Crude oil surge caps strong four-week rally for commodities
7 Oct 2024: COT: Broad buying momentum persists, led by Brent, copper and grains
2 Oct 2024: Q3 2024 Commodity Outlook: Gold and silver continue to shine bright
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