Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Dollar long jumps on EU election woes; Funds start rebuilding crude long
Ole Hansen
Head of Commodity Strategy
Key points:
- Positions and changes made by speculators in commodities and forex in the week to June 11
- Dollar buyers returned with a vengeance, led by selling of euro on French election worries
- Crude oil strength saw hedge funds abandon recently established short positions
- Silver and platinum suffer large reductions after prices slumped below levels that recently saw strong hedge fund demand
- Broad grains sector weakness drove second week of selling, led by corn and soybeans
Forex
After six weeks of selling, dollar buyers returned with a vengeance as the Bloomberg Dollar index gained 1.1%, primarily due to EUR and MXN weakness. Overall the gross dollar long against eight IMM futures and the DXY jumped 55% to USD 17.6 billion. As mentioned, the EUR saw heavy selling in response to French political turmoil to the tune of 24.2k contracts (USD 3.3 billion equivalent). In addition, the CAD also saw aggressive selling, especially after a bumper US jobs report sent the dollar broadly higher, resulting in the biggest weekly sale of CAD futures (37.9k contracts) since 2018, lifting the net short to a record 129.5k contracts (USD 9.4 billion equivalent). Traders also sold yen (6.5k), AUD (13.5k) and MXN (5.7k), but bought sterling (8.9k), CHF (2.9k), and NZD (3.8k).
COT on Commodities
The latest Commitment of Traders (COT) report covered the week to June 11 when the Bloomberg Commodity Index rose 1.5%, the dollar strengthened by around 1% and bond yields traded higher in response to a surprisingly strong US jobs report, causing some jitters ahead of last week's FOMC meeting, the result of which was known the day after data to this report was compiled.
On a sector level, the mentioned gain was solely driven by broad strength across the energy market with crude oil rallying around 6% as buyers returned below USD 80 in Brent and USD 75 in WTI, while natural gas surged higher by 21% in response to increased demand from domestic consumers and towards LNG exports. All the other sectors lost altitude with industrial and precious metals under pressure from the stronger dollar and technical selling from momentum focused funds. The grains sector meanwhile saw renewed selling led by wheat while softs traded mixed.
Hedge funds responded to these developments by adding length to crude oil, gas oil, natural gas, sugar and cocoa while selling all metals, especially silver and platinum. Most grain contracts except corn saw renewed price weakness, leading to increased short selling of soybeans, soy oil and CBOT wheat, while the position changes in softs were relatively muted, except cocoa where buyers lifted the cocoa net long amid fresh tight-supply led buying.
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:
14 June 2024: Commodity weekly: Energy sector gains counterbalance metal consolidation
13 June 2024: Oil prices steady amid divergent OPEC and IEA demand projections
10 June 2024: COT: Brent long cut to ten-year low; metals left exposed to end of week slump
3 June 2024: COT: Crude length added before OPEC+ meeting; gold and copper see profit-taking
31 May 2024: Commodity weekly: Strong month despite late decline in crude and fuel
27 May 2024: COT: Gold and crude see increased demand as dollar longs plummet
24 May 2024: Commodity weekly: agriculture surges, metals fall on fading rate cut hopes
23 May 2024: Podcast: 2024 is heavy metals
22 May 2024: Crude oil struggles near two-month low
17 May 2024: Commodity weekly: Metals lead broad gains
16 May 2024: Gold and silver rally as soft US data fuels market optimism
15 May 2024: Copper soars to record high, platinum breaks out
14 May 2024: COT: Crude long slump; grain purchases surge
8 May 2024: Fund selling exacerbates softening crude outlook
8 May 2024: Grains see bumpy start to 2024 crop year
6 May 2024: COT: Commodities correction spurs muted selling response
3 May 2024: Commodity weekly: Grains boost, correction in softs and energy
2 May 2024: Copper's momentum-fueled rally halts amid weakening fundamentals
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