Head of Commodity Strategy
Summary: This update highlights futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, January 12. A week that dealt with a sharp rise in bond yields and a stronger dollar on the rising prospect for a US stimulus bazooka. Gold ended up being the biggest casualty of these developments with speculators cutting their gold long by almost one-third to the lowest since June 2019
Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.
The below summary highlights futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, January 12. A week that dealt with a sharp rise in bond yields and a stronger dollar on the rising prospect for a US stimulus bazooka after the Democratic party secured a Senate majority. US ten-year bond yields jumped 17 bp to 1.13% while the dollar and stocks both rose. Gold, not surprisingly, ended up being the biggest casualty with speculators cutting their gold long by almost one-third to the lowest since June 2019.
Commodities
The commodity sector was mixed with the Bloomberg Commodity Index adding 0.4% on top of the strong gains seen during the first days of January. The rally however became very uneven with rallies in energy and grains being partly offset by tumbling metals and soft commodities. As a result of this speculators ended up holding a near unchanged long, measured in number of lots, across the 24 major futures contracts tracked in this. The nominal exposure meanwhile declined by $8 billion to $128 billion, primarily due to a near one-third reduction in the gold long representing a value of $8.6 billion.
Table
Energy: The tailwind from the surprise Saudi production cut saw speculators increase crude oil longs in WTI and Brent by 43.4k lots to 667.4k lots, a one-year high. The net has now almost doubled since the early November vaccine announcement which helped increase hopes for a return to normal fuel consumption. A hope that is currently being challenged by continued and prolonged lockdowns across key consuming nations.
Latest: Crude oil (OILUSFEB21 & OILUKMAR21) trade softer but so far without breaking any significant levels. Hopes about a speedy recovery in fuel demand continues to be challenged by lockdowns and the continued rapid spreading of Covid-19. Focus this week on IEA’s Oil Market Report Tuesday and Biden’s inauguration and how soon he can roll out his fiscal stimulus plan. Support in Brent at $54/b the trendline from the November low.
Precious metals led by gold saw a dramatic reduction in net longs after speculators were spooked by the surge in ten-year bond yields above 1% and a stronger dollar. The 13 bp jump in real yields, a key driver for gold, and the accompanying slump back below $1900/oz helped trigger a 31% reduction in the net long to 105k lots, almost the smallest bet on rising prices since June 2019. Despite weakening by 8%, the silver long was left relatively unscathed as the net-long was reduces by 9% to 43k lots, a six-week low.
Latest: Gold (XAUUSD) and silver (XAGUSD) extended their Friday slump on the Asian opening before bouncing strongly to trade higher on the day. On top of last week’s dollar and yield strength a comment from incoming Treasury Secretary Yellen, that the administration is not seeking a weaker dollar, further spooked the market in early trading. However, with real yields back below –1%, the short-term outlook hinges on the dollar with gold facing resistance at $1855/oz.
Grains: Ahead of last week’s WASDE report which triggered another upside price extension led by corn, speculators had reduced longs in soybeans and wheat while increasing the corn long to a ten-year high at 374k lots. Overall the total sector long which include meal, oil and KCB wheat was cut by 12k lots to 790k lots, the first reduction in six weeks.
Latest: US trade grains and soft commodity markets are closed today for Martin Luther King Jr Holiday. Once the markets reopen they will continue to focus on the price impact of Argentina's decision to suspend corn shipments and Russian plans to impose export duties on grains in order to curb rising domestic food prices triggered by the Covid-19 crisis.
Forex
The rising yield-led rise in the dollar during the week to January 12 was met by fresh selling from speculators. Against ten IMM currency futures and the Dollar Index, the combined short rose by 12% to $36.2 billion, a level not seen in almost ten years. The Greenback was sold against all but one of the ten currencies tracked in this. The bulk of the change being the 12,899 lots increase in the EUR net long to 156k lots or €19.5 billion. Multi-month highs were seen in JPY, NZD and BRL.
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 reasons why we focus primarily on the behavior of the highlighted groups are:
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
