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. This update covers the week to February 1, a week where global stocks staged a strong comeback from the January sell-off, bonds and the dollar held steady while the commodity sector surged to a fresh record high. Speculators reacted to these developments by cutting their dollar longs to a 4-1/2-month low, cutting their precious metals exposure in half while also reduce oil longs.
This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, February 1. A week where global stocks staged a strong comeback from the January sell-off. However, with the Fed signaling its readiness to tighten monetary policy, the market, as signaled through the smallest VIX short since May 2020, remains unconvinced about the market's ability to recover more ground. Bonds and the dollar held steady ahead of Thursday when hawkish BOE and ECB central bank meetings drove yields higher and the dollar lower.
Commodities
The Bloomberg Commodity Index continued its weeklong ascent with the near 3% gain taking the index to a fresh record high. Gains were led by the energy and grains sectors with natural gas (22%), crude oil (3%) and soybeans (9%) recording strong gains. Precious metals meanwhile took a hit following the hawkish FOMC meeting on January 26. With soft commodities and copper also trading weaker the overall position held by large money managers held steady with additional longs in gas oil, natural gas, soybeans and cattle being offset by reductions across gold and silver, as well as copper, wheat and sugar.
Energy: Despite hitting seven-year highs, speculators sold crude oil for a third week with buying of WTI being more than offset by a 5% reduction in the Brent long. The reduction in Brent being driven by profit taking and an increase in the gross short to a five-week high at 73.6k. The next update will give us a hint whether short covering was behind the end of week rally which saw Brent close above $92 for the first time since October 2014. With the recent reductions the combined net long at 533k lots remains more than 200k lots below the latest peak from last June when prices were more than 25% below todays.
The surprise reductions despite strong momentum in recent weeks can probably be partly explained by the rising level of volatility across markets forcing speculators who target a certain level of volatility to reduce their exposure. Thereby going against the prevailing behavior where trend and momentum following funds would normally buy into strength.
Metals: Gold and silver speculators strong technical-driven accumulation of longs just ahead of the hawkish FOMC meeting on January 26 triggered a major week of selling. The gold long was cut by 47% to 62.5k lots, a four-month low, while the 58% reduction in silver saw it wipe out six weeks of buying. Gold’s ability to bounce back above $1800 last week potentially supported by a recent rise in the gross short to 60k lots, the biggest bet on falling prices since October. The Chinese New Year lull saw copper trade sideways funds cut their net long by one-third to a six-week low at 19.2k and down 65% from the recent cycle high from last October.
Agriculture: The grains sector was mixed with a surging soybean complex attraction 64k lots of net buying lifting the combined long to a nine-month high at 312k lots. Corn was bought for a second week with the net long at 373k lots being just 30k lots below the ten-year high recorded last April. Wheat meanwhile struggled with the 6% sell off triggering a doubling of the net short to 26.4k lots.
In softs, selling of sugar continued with the 25% reduction cutting the net long to 71k lots, the lowest since June 2020. Cocoa traders extended their net short as prices rose by more than 4%. Coffee length saw a small reduction but overall, the net has not seen much change during the past four months.
Financials:
The Cboe VIX futures net short was cut to the lowest since May 2020 as speuculators continued to reduce short bets in response to rising volatility following weeks of stock market turmoil. The VIX curve normally trades in contango with spot volatility being lower than future volatility. Such a structure favor those holding and rolling short VIX futures positions. However, the recent rise in spot volatility has for now reduced the attractiveness of holding net short positions.
Forex
Speculators continued to reduce bullish dollar bets the week ending last Tuesday, February 1, and after four weeks of net selling the gross long against ten IMM currency futures and the dollar index has fallen by 42% to a 4-1/2-month low at $13.7 billion. The latest reduction was well timed after hawkish central bank meetings at the ECB and BoE helped send the dollar sharply lower on Thursday. Looking under the bonnet however, we find some ill-timed selling of both euros (-1,844 lots) and not least sterling (-15,842) with the net short on the latter jumping by 200% to 23,605 lots or the equivalent of $2 billion. All the other major currencies were bought, led by JPY, CAD and AUD, and together with strong buying of the Ruble they more than made up for the mentioned selling of euro and sterling.
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
