Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Buyers return to crude as gold stays strong; Yen buying hits historic levels
Ole Hansen
Head of Commodity Strategy
Key points:
- Positions and changes made by speculators in commodities and forex in the week to August 13
- Hedge funds turned selective buyers of key commodities following the early August deleraging crash
- In demand were crude oil and not least gold ahead of last week's jump to a fresh record high
- Grains sector remains heavily shorted with ample supply of soybeans the latest driver
- The speuculative IMM yen position has undergone a historic turnaround
Forex:
Six weeks of yen buying saw speculative traders turn bullish for the first time since 2021, and the change during this short time frame from a record 184,000 contract short to a 23,000 net long shows just how aggressive the deleveraging activity has been, not least considering the yen only strengthened by 6.5% during that time. Overall, the gross USD long against eight IMM futures held steady around USD 11 billion, with the mentioned buying of yen being offset by selling of EUR and especially GBP. Elsewhere, the MXN long, a recent favourite carry trade against the yen, saw a 23% reduction in the net long.
Commodities:
Global financial markets have made a strong recovery, with early August's market turmoil now a distant memory. This turnaround comes after better-than-expected US economic data reduced fears of a severe downturn in the world's largest economy, thereby easing pressure on the Federal Open Market Committee (FOMC) to implement deep interest rate cuts. However, China, the world's top consumer of commodities, remains weak due to a persistent property slump, rising unemployment, and weak consumption.
These developments should prompt caution regarding the commodities sector from a demand perspective. However, the supply side of key commodities might find support from geopolitical events, adverse weather, industrial action, and the weakest hedge fund positioning in more than a decade, which could spur fresh demand and technical-driven support.
Focusing on the latter, hedge funds returned as buyers in the week to August 13 after cutting their net position across 26 major futures contracts to the first net short in more than a decade. The reporting week saw the Bloomberg Commodity Total Return index trade 1.6% higher with strong gains across energy, led by crude oil and natural gas, and precious metals more than offsetting another slump in grains after the US government lifted their production forecasts, especially for soybeans.
Hedge funds returned to Brent with the net long rising 44,000 (174%) from a record low in the previous week, while bullish gold bets rose to near a 4-1/2 year high at 220,000 ahead of Friday’s jump to a fresh record high, while the silver long remained weak at just 24,000. Copper length stayed weak ahead of the strike-led bounce that followed later in the week.
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:
6 Aug 2024: Video: What factors are fueling the current market turmoil and gold's response
5 Aug 2024: COT: Broad commodities sell-off gains momentum; Forex traders seek JPY and CHF
5 Aug 2024: Commodities: Position reduction in focus as volatility spikes
2 Aug 2024: Widespread commodities decline in July, with gold as the notable exception
31 July 2024: Crude's month-long slide halted by fresh Mideast worries
30 July 2024: Record demand explains gold's current resilience
29 July 2024: COT: Energy and metals selling cuts hedge fund long to four-month low
4 July 2024: Sluggish US economic indicators boost demand for gold and silver
4 July 2024: Podcast Special: Quarterly Outlook - Sandcastle Economics
2 July 2024: Quarterly Outlook - Energy and grains in focus as metals pause
1 July 2024: COT: Crude long builds ahead of Q3 while grains selling accelerates
28 June 2024: Metals and natural gas propel commodity sector to quarterly gain
26 June 2024: Crude seeks support from seasonal demand strength
24 June 2024: Copper's resilience despite China weakness
18 June 2024: Precious metals go through prolonger period of consolidation
17 June 2024: COT: Dollar long jumps; Funds start rebuilding crude long
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
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