Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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COT: Weakest commodities conviction since 2015
Ole Hansen
Head of Commodity Strategy
Summary: Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to last Tuesday, January 2. Covering an end of year week that saw equity market gains being defended, while the commodity sector slumped with losses being led by the energy and grains sector. Overall resulting in hedge funds holding the smallest end of year net long across 24 major commodities since 2015.
Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities while in forex we use the broader measure called non-commercial.
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.
This summary highlights futures positions and changes made by hedge funds across commodities and forex in the week to last Tuesday, January 2. Covering an end of year week that saw equity market gains being defended, the dollar trading a tad firmer, mixed bond yields, while the commodity sector slumped with losses being led by the energy and grains sector. Overall resulting in hedge funds holding the smallest end of year net long across 24 major commodities since 2015.
Commodities:
The Bloomberg Commodity index which tracks a basket of 24 major futures markets split near evenly between energy, metals and agriculture, traded lower by 1.8% on the week driven by losses across all sector most notably energy (-3.6%) and grains (-3.5%) with the biggest individual losses seen in crude oil (-6.9%), palladium (-9%), fuel products, wheat and soybeans.
As a result of this weakness, the net long held by hedge funds and CTAs slumped 25% to 307k lots, the weakest end of year position since 2015, split between energy (322k), metals (181k) and agriculture (-196k). Long positions were held in 14 while the 10 net short positions were mostly held across the agriculture sector led by grains. The biggest long positions based on a notional dollar value were gold ($28.5 bn), crude oil ($19.2 bn), RBOB gasoline ($6.3 bn) and Arabica coffee ($2.9 bn) while the biggest short positions were corn (-$4.6 bn), wheat (-$1.8 bn) and soybean oil (-$1.5 bn)
These developments highlight an increasingly under-owned asset class which struggled last year amid growth worries in China and the wider world, and a sharp rise in funding costs leading industries to reduce excess inventories. It also highlights a sector which, given the right circumstances, may rebound in 2024 once the technical and/or fundamental outlook becomes more supportive, thereby leading to fresh buying and short covering. Drivers that may trigger such a change could be rate cuts lowering the funding costs and with that the inherent contango leading to industry restocking of inventories, OPEC maintaining a tight control of the supply of crude oil, and not least signs of tightness across key commodities that will help offset the risk of an economic slowdown across key economies.
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
12 Nov 2023: Copper supported by green transformation demand and peak rate speculation
10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside
Previous "Commitment of Traders" articles
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An underowned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
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