Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Crude long cut to a 12-year low; Dollar short more than doubling
Ole Hansen
Head of Commodity Strategy
Key points:
- Positions and changes made by speculators in commodities and forex in the week to Septermber 3
- Dollar short position more than doubles despite some emerging greenback strength
- Crude oil net long slumps to a 12-year low amid demand worries and technical selling
- Metals see broad long liquidation led by gold and silver
- A strong week of grains buying still leaves the most bearish-ever view for this time of year
Forex:
The Bloomberg Dollar Index, which tracks the greenback's performance against a broad basket of major currencies, rose 1% in the week to 3 September. Despite this, speculators nevertheless accelerated their dollar selling against the currencies tracked in this update, highlighting an often delayed reaction in positioning relative to price. The dollar short against eight IMM futures more than doubled to USD 16.2 billion, a 13-month high, with the pace of selling seen during the past three weeks being the most aggressive since March 2020, when the global pandemic temporarily hurt global growth.
The change was primarily driven by the CAD, where short-covering reduced the net short by 38% to 68.5k contracts. Speculators also added to length in GBP and EUR, while the JPY net long jumped 59% to 41k contracts, nearing the January 2021 peak of 50.5k contracts.
Commodities:
Worries that the current weak demand outlook in China may spread to the rest of the world was the overriding focus during the reporting week to 3 September, when the Bloomberg Commodity Index suffered a 2% setback, primarily driven by weakness across the growth-dependent sectors of energy and industrial metals. In addition, a stronger dollar helped trigger profit-taking across precious metals, leading to the biggest—albeit still relatively small—reduction in the elevated gold long.
A near 7% slump in crude through technical support levels triggered a combination of long liquidation and fresh short selling, which overall left the combined net long in WTI and Brent at the lowest level in 12 years. Recent and persistent weakness across the refined fuel market helped drive an increase in the net short position in the London and New York diesel futures. Combining the five major crude and fuel contracts, the net long of these fell to the lowest level since 2011, when the ICE Exchange started to collect Brent and gas oil data.
Elsewhere, gold, as mentioned, suffered a small reduction while sellers attacked platinum to flip their net position back to a short. Three weeks of tentative copper buying saw a partial reversal as the High Grade futures price slumped by 5%.
The agriculture sector, meanwhile, saw net buying, driven by the grains sector following another week of sizable short-covering across all the major U.S. grain and oilseed futures. However, despite a 38% reduction from the July record short, the net short across the three major contracts was still a record for this time of year. Elsewhere, a second week of strong sugar buying helped lift the net long to a five-month high.
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:
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
30 Aug 2024: Commodities sector eyes fourth weekly gain amid softer dollar and Fed expectations
27 Aug 2024: Month-long sugar slide pauses amid concerns of Brazil's supply
27 Aug 2024: Libya supply disruptions propel crude prices higher
26 Aug 2024: COT: Funds boost metals investment as dollar long positions halve amid weakness
23 Aug 2024: Commodities Weekly: Metal strength counterbalancing energy and grains
22 Aug 2024: Persistent supply contraints keep cocoa prices elevated
21 Aug 2024: Weak demand focus steers crude towards key support
19 Aug 2024: Resilient gold bulls drive price to fresh record above USD 2500
19 Aug 2024: COT Buyers return to crude as gold stays strong; Historic yen buying
16 Aug 2024: Commodities weekly: Gold strong as China weakness drags on other markets
9 Aug 2024: Commodities weekly: Calm returns to markets, including raw materials
8 Aug 2024: Sentiment-driven crude sell-off eases, allowing traders to focus on supply risks
7 Aug 2024: Limited short-selling interest observed during copper's recent aggressive correction
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
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