COT: Hawkish FOMC hurts gold longs and USD shorts
Head of Commodity Strategy
Summary: Futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, June 22, a week that dealt with the aftermath of the hawkish FOMC meeting on June 16. The stronger dollar triggered a one-third reduction in the speculative dollar short while losses in metals and grains drove down the Bloomberg Commodity index by 2.2%, thereby triggering the biggest one-week reduction in bullish bets in four weeks
The below summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, June 22. A week that dealt with the aftermath of the hawkish FOMC meeting on June 16. While most asset classes initially sold off, some including bonds and stocks had recovered strongly by the end of the reporting week last Tuesday. The stronger dollar meanwhile triggered a 31% reduction in the speculative dollar short while losses in metals and grains drove down the Bloomberg Commodity index by 2.2%, thereby triggering the biggest one-week reduction in bullish bets in four weeks.
The commodity sector led by metals and grains took a tumble following the June 16 FOMC after the hawkish signal helped send the dollar higher and the inflation expectations lower. The total net long across 24 major commodity futures tracked in this was reduced by 6% to 2.24 million lots, a four week low. Biggest reductions seen in gold, silver and platinum as well as soybeans and sugar, while crude oil longs were left untouched amid strong fundamental tailwinds.
Energy: Crude oil, products and natural gas all traded higher during the reporting week, thereby avoiding the post-FOMC weakness that was seen across metals and agriculture. Strong fundamentals driven by OPEC+ keeping supplies tight as global demand recovers helped cushion crude oil with speculators only cutting their net long positions by 1% in both WTI and Brent.
Latest: Crude oil trades steady near the highest since 2018 with market participants expecting OPEC+ will keep supplies tight enough to support current levels. The group meets on Thursday to decide production levels from August and beyond, and the market is currently looking for an increase of 500,000 barrels per day which is less than the increases seen during the past three months. With virus uncertainties due to the highly contagious delta strain and questions about an Iran nuclear deal hanging over the market, the group may opt for caution, hence the current price strength. Brent support at $74.5 while it would need to break below $72 before signaling risk of a deeper correction.
Metals: Speculators made deep cuts to their gold, silver and platinum longs after the FOMC meeting helped boost the dollar while lowering inflation expectations. The accelerated selling that followed the meeting helped drive down gold longs by 33% to 76k lots, a seven-week low and silver by 36% to 29k lots while the 81% reduction in platinum longs returned the position to neutral. Focusing on the latter, the relative strength seen in platinum since the initial sell-off can to a certain extent be explained by speculators rebuilding their long positions.
Latest: Gold continues to consolidate below $1800 with a break above $1820 probably needed to attract short-covering and fresh buying interest, especially after many speculators threw in the towel following the hawkish FOMC meeting on June 16. Before then the market remains focused on the dollar and its recent price adverse strength and whether inflation is indeed transitory, as signaled by central banks, or becoming more entrenched.
Agriculture: Speculators cut bullish grain and soybean bets to a nine-month low with the biggest reductions seen in soybean and bean oil. Bucking the trend we saw the wheat position flipping back to a small net long.
In forex, the broad dollar buying that followed the hawkish FOMC meeting on June 16 helped trigger a 31% reduction in speculative dollar short against ten IMM currency futures and the Dollar Index. The biggest flows that triggered the $6 billion reduction to a seven-week low at $13.1 billion was primarily driven by sales of euro (-29k lots), sterling (14k) and yen (7k). Despite falling by 2.2% the Swiss franc was bought to the tune of 4k lots.
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
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.