COT: Funds remain cautious despite rising commodity prices
Head of Commodity Strategy
Summary: The COT reports published weekly by the US CFTC highlight futures positions and changes made by hedge funds across commodities, forex and financials during the latest reporting week to last Tuesday, October 26. A week where healthy risk appetite continued to send stocks higher while keeping the dollar unchanged. The bond market meanwhile saw surging inflation expectations drive real yields lower while speculators in commodities showed limited appetite for more exposure despite prices in some cases hitting fresh multi-year highs.
This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, October 26. A week where healthy risk appetite continued to send stocks higher while keeping the dollar unchanged. The bond market was anything but quiet with surging inflation expectations and worries of sooner-than-expected rate hikes driving short end rates higher. Real yields got caught up in the rout, and during the reporting week, the ten-year tenor saw a precious metal supporting drop of 17 basis points before reversing sharply higher towards the end of the week.
During the reporting week, the Bloomberg Commodity Index hit a fresh multi-year high with gains in energy and several key agriculture commodities more than offsetting a tough week for industrial metals. However despite the 1.7% rise the price gains failed to attract much in terms of fresh hedge fund buying. The combined net long across the 24 major futures contracts tracked in this only saw a small 1% increase to 1.97 million lots. Net length was added in gold and silver, as well as grains while reductions were seen in crude oil, natural gas, copper and most soft commodities.
Energy: Speculators continued to sell into crude oil strength, not least Brent crude where the gross short rose to a near three-month high at 80.2k lots. A 12% jump in the price of natural gas also failed to attract fresh buying with the net long instead falling by 8% on a combination of profit taking and fresh short selling.
Metals: Big jumps in the speculative length of gold (+46%) and silver (+49%) left both metals exposed to the end of week reversal in US real yields and especially gold’s inability to mount a proper attack on resistance above $1800. Copper’s 4.6% correction only triggered a small amount of selling which is interesting given the number of recent established longs having been caught offside.
Agriculture: The grains sector saw another week of buying and this time length was added to all the six contracts led by corn and the soybeans complex. The soft sector was generally hit by profit taking as speculators sold into rising markets, especially sugar where a 4.2% price jump was met by a 8% reduction in the net long to 163k lots, a 40% reduction since August.
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Crude oil has started the week trading mixed ahead of Thursday’s OPEC+ meeting and after Biden told the group to “pump more oil”. Whether or not that will change the groups 0.4m b/d per month increase remains to be seen, but it has raised speculation it could increase the chances of an Iran nuclear deal. Also, over the weekend China released diesel and gasoline reserves in order to try and curb domestic prices. The market will also watching EU and Asian gas price developments as well as Wednesday’s weekly EIA stock report, where a sharp reduction at Cushing in recent weeks has resulted in elevated WTI time spreads as the market worries about low supplies at this important delivery point. In the week to October 26, specs cut bullish oil bets for a third week, and despite trading near multi-year highs the current 600 million barrels long (WTI & Brent) is now 136 million barrels below the February and June peaks.
Gold dropped the most in two weeks on Friday on elevated swings in US real yields. An example being the ten-year tenor which jumped to –0.9% after reaching –1.15% on Thursday. Surging short-end interest rates have raised concerns central banks are losing control and with this in mind precious metals will be trading nervously ahead of central bank meetings this week from the FED, RBA and BOE, where the market will be focusing on the pace of tapering and any guidance on future rate hikes. From a technical perspective, gold needs to hold above the 21-day moving average at $1777, as a break below could signal further loss of momentum.
The aggregate dollar long against ten IMM currency futures and the Dollar Index was reduced again last week, and since hitting the highest since June 2019 the past three weeks has seen the length reduced by 8% to the $23 billion.
Buying was concentrated in GBP (+13.3k lots), which rose on interest rate hike speculation, and CAD ahead of Wednesday’s hawkish Bank of Canada meeting where the bank announced an end to its Quantitative Easing program while raising the prospect sooner than expected rate hikes. The 14.2k lots of net buying flipped the net back to a small long with additional small buying seen in EUR, AUD and NZD.
Just like in recent weeks, the selling was concentrated in CHF (-1.8k) and not least JPY where 4.3k of net selling lifted the net-short to near a three-year high at 107k lots. Among the minor currencies, continued selling of MXN lifted the net short to a March 2017 high.
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:
- 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