Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Brent long cut to ten-year low; Metals left exposed to end of week slump
Ole Hansen
Head of Commodity Strategy
Key points:
- Positions and changes made by speculators in commodities and forex in the week to June 4
- Six weeks of net selling has cut the dollar long by 61%, with JPY, EUR and GBP in demand
- A 5% slump in the BCOM index triggered the biggest fund exodus since December 2017
- The WTI and Brent crude oil long falls to level only seen twice in the past 12 years, led by heavy Brent selling
- Limited reduction in metals left them exposed ahead of Friday's strong US jobs report
Forex
The non-commercial dollar long versus eight IMM futures and the dollar index extended a succession of weekly declines to six, and during this time the gross dollar long has been cut by 61% to USD 11 billion during a period where the dollar index drifted lower by just one percent. In the latest reporting week to June 4 the flows remained heavily skewed towards dollar selling, led by buying of 24k contracts of JPY (USD 1.9 billion equivalent), 10.3k EUR (USD 1.4 billion), 17.8k GBP (USD 1.4 billion). Partly offsetting these were small selling of CHF and CAD, driving their respective net shorts to biggest since 2018 and 2017 respectively. Despite a 5.1% Mexico election-driven slump, the MXN long nevertheless saw a small increase.
COT on Commodities
The latest Commitment of Traders (COT) report covered a week to June 4 when the Bloomberg Commodities Total Return Index slumped by 5%, with all sectors suffering declines after a stronger dollar and rising bond yields helped sour sentiment. On an individual sector level, losses were led by energy where crude oil slumped around 8% after OPEC+ made an ill-timed decision to discuss production hikes from October. This resulted in the Brent crude net long slumping to a ten-year low, inadvertently setting the stage for a recovery once the technical and/or fundamental outlook improves.
Elsewhere, the industrial metal sector dropped 5.3%, led by copper’s 6.5% decline after the recent strong rally deflated amid lack of fundamental support given the current weakness in copper-related data from China. Precious metal weakness was led by silver and platinum, both slumping by around 7% while gold managed a small gain. The grains sector saw renewed and broad weakness while supply worries supported softs.
Managed money accounts responded to these developments by turning net sellers of all sectors, and except for a handful of contracts, all 26 futures contracts tracked in this update saw net selling. Overall, the combined net long was almost cut in half to 446k contracts, the biggest one-week reduction since December 2017, primarily led by heavy selling of crude oil (-151k), soybeans (-46k), and corn (-80k).
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:
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
29 April 2024: COT: Gold bulls stand firm despite recent correction
26 April 2024: Commodity weekly: Sticky inflation and adverse weather focus
23 April 2024: What drives the gold and silver correction ?
22 April 2024: COT: Declining momentum may signal shift toward consolidation
19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
15 April 2024:COT: Hedge funds propel multiple commodities positions beyond one-year highs
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
8 April 2024:COT: Speculative interest in metals and energy gain momentum
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
2 Apr 2024:COT: Gold and crude longs maintained amid strong underlying support
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