Head of Commodity Strategy
Summary: The below summary and report highlight futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, April 6. A week where the weaker dollar and lower U.S. Treasury yields helped drive strong gains across global stock markets, as well as dollar and rate sensitive commodities such as metals, led by gold.
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, April 6. A week where the weaker dollar and lower U.S. Treasury yields helped drive strong gains across global stock markets. Commodities generally traded higher with gains in grains, softs as well as dollar and rates sensitive metals more than offsetting losses in energy, most noticeable oil and natural gas.
Our recently published Quarterly Outlook titled “The world is short of everything” takes a closer look at the short to medium term macro-economic outlook and how it may impact the different asset classes of forex, stocks, commodities and bonds.
Commodities
Despite seeing the Bloomberg Commodity index trade higher by 1%, speculators continued to cut bullish bets for a sixth week, albeit at a much reduced pace compared with recent weeks. The net long across 24 major futures contracts was reduced by 1% to 2.3 million lots, down 18% from the late February record at 2.8 million lots. Biggest reductions in crude oil, natural gas, corn and all four soft contracts while gold saw strong buying followed by soybeans and live cattle.
Energy: The combined net long in WTI and Brent crude oil was reduced by 41.2k lots to 630k lots as both contracts continue to lose momentum. The lowest bet on rising prices since early January occurring at a time where crude oil has become rangebound with the prospect for stronger economic growth and demand helping to offset the impact of a resurgent coronavirus just as OPEC+ prepares to add supply over the coming months. Adding to the current lack of visibility are ongoing talks between Iran and world powers to reinstate the 2015 nuclear deal.
Crude oil bulls however will take some comfort from the fact the reductions so far has primarily been driven by long liquidation while the appetite for short selling remains low. Last week oil posted its worst week in three and while the demand outlook into the second half looks strong, short-term challenges are likely to keep Brent rangebound, currently between $60 and $65.
Metals: The biggest change across the commodity sector was a 53% jump in the gold net long to a six-week high at 77.4k lots. Being the most dollar and interest sensitive of all commodities, hedge funds turned net buyers in response to the weaker dollar and lower yields. In addition the rejection below $1680/oz, now a double bottom, helped drive a 20% reduction in naked shorts while adding a dose of optimism into one of the worst performing commodities in 2021. With the other four metals including copper also being bought the total metal net long rose to 178k lots from a near two-year low.
We maintain a short-term neutral view on gold and while the twice rejection below $1680 points to a double bottom it still needs confirmation, hence the almost intense market focus on $1765 and the subsequent technical reaction on a break.
Agriculture: The grains sector saw a small rotation out of corn back into soybeans and wheat. Overall the net long in the three major crop contracts held steady at 533k lots, close to the average seen so far this year. However with 72% of the length held in corn it is the contract that currently has the biggest correction risk should the technical or current strong fundamental outlook change.
Selling of all four soft commodities extended into a sixth week with the most noticeable change being the 51% reduction in the Arabica coffee net long. Just as the price jumped on renewed expectations for a large world deficit in 2021-22, and recent dry weather in Brazil hurting an already drought-stricken crop in the world’s largest supplier.
Forex
Despite broad dollar weakness the flows were predominantly skewed toward continued dollar buying (short covering). The net short against ten IMM currency futures and the Dollar Index was reduced to just $5.4 billion, an 11-month low and down 85% since the mid-January peak at $37 billion. The two biggest casualties during this time has been the euro and Japanese yen, and while the euro long has been reduced by the equivalent of $15 billion, the yen position has seen a $12.5 billion swing from long to short.
Last week’s 6.2k lots of euro selling reduced the net-long to a one-year low at 67.5k lots. Elsewhere the longs in Aussie dollar and Canadian dollar were cut by 67% and 59% respectively while the only noticeable buying was seen in yen. During the past 11 weeks almost non-stop selling has taken the net from a 50k lots long to a near 60k lots short, before finally managing to attract a small amount of short covering.
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
