Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
COT: Crude length cut ahead of Israeli strike; silver and platinum see strong demand
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, 22 October.
- Speculators' demand for USD accelerated, leading the most aggressive four-week period of EUR selling since November 2015.
- Some risk aversion was seen in commodities despite broad price strength, with energy, industrial metals, and softs seeing net selling.
- Demand for investment metals continued, with funds focusing on silver and platinum, both reaching levels of positioning which, on four previous occasions since 2020, proved unsustainable.
Forex:
Speculators demand for dollars accelerated in the week to 22 October, when the Bloomberg Dollar index rose 0.7% amid a rise in US Treasury yields as traders positioned themselves for the risk of potential Red Sweep on November 5. A result that may lead to excessive government spending, pushing the debt-to-GDP ratio higher, while fueling inflation fears, potentially slowing further the pace of expected rate cuts, thereby making the Greenback relatively more attractive on rate differential perspective.
Overall, the net dollar long against eight IMM currency futures jumped USD 10.9 billion to a 3-1/2 month high. Except the AUD, selling was broad led by JPY and CAD, and not least EUR where the most aggressive four-week selling period since November 2015 resulted in the biggest net short in two years after speculators sold 45.7k contracts, the equivalent of USD 6.2 billion.
Commodities:
In the latest reporting week, the Bloomberg Commodity Index rallied 1.8%, thereby fully recouping losses in the previous week. All sectors except softs saw higher prices, led by precious metals where all metals saw demand amid haven demand ahead of the US elections, with silver jumping more than 10%, after breaking resistance-now-support at USD 32.50. Elsewhere the energy sector, except natural gas, grains and livestock all recorded gains, while industrial metals were muted as the China stimulus rally deflated.
Managed money accounts, such as hedge funds and CTAs, responded to these developments by a mixed and somewhat counterintuitive reaction, not least the energy sector where traders for a second week sold into the rally. Highlighting a market where traders, correctly had started to price out the risk of a major disruption to oil flows from the Middle East. Crude oil slumped more than 4% in early Monday trading after Israel's limited attack on Iran avoided the nation's energy infrastructure, thereby reducing the risk of a disruption and potentially signalling a de-escalation. Prices have now retraced most of the early October China stimulus and Iran supply risk boost, weighed down by sluggish demand and the risk of rising supply of currently unwanted barrels from OPEC+ next month.
In metals, the silver net long jumped to a 31-month high at 47.4k contracts, a level which on four previous occasions since mid-2020 had triggered profit taking and long-liquidation. It is however also worth noting that the all-time high reached in April 2017 was more than double that at 99k contracts. The net long in platinum also reached a 31-month high at 25k contracts, and just like silver, a level which on several occasions since 2020 signaled a top and reversal in prices. The palladium short was cut ahead of an end of week surge triggered by Russian sanctions talk, while copper selling continued as the China stimulus impact continued to fade.
Grains traded mixed with selling of soybeans being more than offset by demand for soybean oil and corn, the behavior in the latter highlighting a great deal of uncertainty after both the gross long (+38k) and the gross short (+23k) received a boost. Finally, the softs sector, except cotton, saw selling amid improved weather outlook in key production regions sending cocoa and coffee prices lower. Livestock, an area we normally do not give that much attention, has seen five consecutive weeks of buying drive the live cattle net long to a one-year high at 90k and lean hogs
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:
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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