Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Speculators flock to dollars, exit commodities ahead of the US elections
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, 29 October
- Continued and aggressive dollar buying, led by heavy selling of EUR, JPY and CAD lifted the dollarlong to a 3-1/2-month high
- A week of losses across most commodities triggered broad selling from funds led by crude oil, gas oil, gold, silver and soybeans
Forex:
Speculators' demand for USD picked up additional momentum in the week to 29 October, when Treasury yields and the dollar continued to strengthen ahead of the US election as traders positioned themselves for the risk of a potential red sweep—a result that may lead to excessive government spending, pushing the debt-to-GDP ratio higher, while fueling inflation fears, potentially further slowing the pace of expected rate cuts, thereby making the greenback relatively more attractive from a rate differential perspective.
Overall, the net USD long against eight IMM currency futures almost doubled to USD 18.1 billion, a 3-1/2-month high, led by continued and aggressive selling of EUR, JPY, and CAD. The EUR net short jumped to a March 2020 high at 50,000 contracts; the JPY flipped back to a net short of 37,600 contracts, while the selling of 26,900 contracts of CAD lifted the net short to 167,500 contracts, or USD 12 billion equivalent, and by far the biggest net short against the dollar.
Commodities:
In the latest reporting week, the Bloomberg Commodity Index fell 1.5%, with broad losses seen across all sectors except livestock, which rose, and precious metals, which traded flat. The biggest losing sector was energy, with crude oil losing more than 6%, while natural gas slumped by around 10%. The metals sector was mixed, with long liquidation in gold and silver on increased election and FOMC jitters joined by another week of copper selling, while the PGMs stood out, supported by a near 14% rally in palladium on continued short covering amid Russian supply risks. Grains traded heavily with the US harvest weighing on prices, while softs were mixed, with a strong rebound in cocoa as the main focus.
Managed money accounts, such as hedge funds and CTAs, responded to these developments by being broad sellers, with 20 out of the 27 major commodity futures tracked in this update seeing net selling, led by crude oil, gas oil (diesel), gold, silver, and soybeans, while demand was concentrated in platinum, palladium, and corn.
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:
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
30 Sept 2024: COT: Fed and PBOC trigger largest weeklyl surge in commodities demand in a decade
27 Sept 2024: Commodity weekly: Industrial metals gain strength during a week of crude weakness
26 Sept 2024: Crude prices drop again as Saudi and Libya supply concerns grow
24 Sept 2024: Fed and PBOC add momentum to commodities market rebound
23 Sept 2024: COT: Dollar short reduced; Investment metals see strong demand ahead of FOMC
20 Sept 2024: Commodity weekly: Commodities boosted by bumper rate cut
20 Sept 2024 Video: Gold or silver, which metal will perform the best
17 Sept 2024: With gold reaching new heights, silver shows potential
16 Sept 2024: COT: Record short Brent and gas oil positions add upside risks to energy
11 Sept 2024: Crude slumps amid technical selling and recession fears
10 Sept 2024: US Election: will gold win in all scenarios
9 Sept 2024: COT: Crude long cut to 12-year low; Dollar short more than doubling
5 Sept 2024: Can gold overcome the 'September curse'?
4 Sept 2024: Wheat rises on European crop worries
3 Sept 2024: Chinese economic woes drag down crude oil and copper
2 Sept 2024: COT: Commodities see broad demand as the USD slumps to a net short
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