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 and forex during the latest reporting week to last Tuesday, April 26. A week that saw a continued deterioration in the global growth outlook driven by extended China lockdowns and increasingly aggressive rate hike signals from members of the US FOMC. The commodity sector saw the Bloomberg Commodity index record a rare loss leading to a broad reduction in speculative longs across all sectors. The net long dropped to a five-month low led by sugar, gold, copper, corn, cocoa and silver.
This summary highlights futures positions and changes made by hedge funds across commodities and forex up until last Tuesday, April 26. A week that saw a continued deterioration in the global growth outlook driven by extended China lockdowns and increasingly aggressive rate hike signals from members of the US FOMC. The S&P 500 lost 6.4% while VIX jumped 12% to 33.5%. The broad Bloomberg dollar index rose 1.3% while ten-year bond yields slumped by 22 basis points to 2.72%.
Commodities
The Bloomberg Commodity Spot index dropped 2.3% after hitting a post-Easter record high with all sectors registering losses led by industrial metals (-5.2%) and precious metals (-4%). In response to these developments, hedge funds cut bets on rising commodity prices by the most since last November. Seventeen out of 24 contracts saw net selling with overall net long being reduced by 8% to 2 million lots, representing a $14.3 billion drop in the nominal value to $149.3 billion.
Biggest reductions hitting the metal sector led by gold and copper, followed by the softs sector. The energy sector saw no appetite for adding exposure, despite strong gains among the fuel contracts.
Latest updates on crude oil, gold and copper can be found in our daily Market Quick Take here
Energy: Crude oil was mixed with surging fuel prices supporting a relative outperformance of the WTI contract, but overall a 12k lots increase in WTI was more than offset by a 14k lots reduction in Brent, on global demand concerns, thereby leaving the net down by 2k to 411k lots, and near a 17-month low. Fuel products surged higher amid tightness caused by Russian sanctions with gasoil in Europe and diesel in New York (ULSD) both surging higher by 30% and 27% respectively. These changes, however, did not attract any appetite for adding risk with both contracts seeing only small changes.
Metals: The combination of growth concerns, especially in China, and very aggressive rate hike statements from US FOMC members, combined with a stronger dollar, helped drive a dismal week for both industrial and precious metals. Speculators responded to the 2.8% drop in gold by cutting bullish bets by 20% to 99.4k lots with the bulk of the change being driven by long liquidation, not fresh short selling. A similar picture in silver which in response to a 7.4% loss saw its net long being cut by 36% to 26.5k lots.
Platinum saw 13.3k lots of selling flip the net positions back to a net short for the first time since September. HG Copper fared even worse with speculators wiping the slate clean with the net returning close to neutral for the first time since May 2020 when the price was trading close to half the current level.
Agriculture: The grains sector saw the net long being reduced from a ten-year high by 36k lots to 783k lots. Selling was led by corn and soybeans while wheat only witnessed a small reduction in an already relative small bullish bet. The exception was soybean oil which jumped 5.4% in response to a growing global supply crisis impacting edible oils such as sunflower and palm oil.
The softs sector saw the biggest week of net selling since November with the stronger dollar and a general deterioration in risk appetite triggering reductions across all four commodities led by sugar and cocoa.
Forex
Another week of broad dollar strength with the Dollar Index rising 1.3% saw speculators turn net buyers of dollars for the first time in four weeks. The net long versus ten IMM currency futures and the Dollar Index rose 8% to $15.7 billion. Currencies seeing the biggest amount of net selling was led by the euro (-9.1k lots) and sterling (-10.7k lots) with the latter seeing the net short reach a 2-1/2-year high at 69.6k lots. Yen short covering after hitting a 20-year low supported a temporary bounce, and with that a 11.7k lots reduction in the net short to 95.5k lots, still by far the most shorted currency against the dollar.
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:
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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