Head of Commodity Strategy
Summary: Broad price gains in the week to February 18 saw hedge funds turn net-buyers for the first time in four weeks. In demand were the safe-haven metals of gold and silver as well as those with a tightening supply outlook such as cocoa, sugar and wheat. Funds continued to cut crude oil longs as the rally extended into a second week. A development that highlights the worries related to the demand shock caused by the virus outbreak in China.
Saxo Bank publishes two 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.
Broad price gains in the week to February 18 saw hedge funds turn net-buyers for the first time in four weeks. The sentiment was temporarily supported by actions from the People’s bank of China and the market mistakenly adopting the narrative of the virus outbreak primarily being a Q1 event. The underlying uncertainty remained and that was strengthened towards the end of last week on renewed fears as the virus intensified beyond China’s borders.
The canary in the coal mine was gold and silver which despite dollar strength and the attempted rally among pro-cyclical commodities saw continued strong buying. In our Commodity Weekly from Friday titled “Gold is in the midst of a perfect storm” we highlighted the reasons why precious metals continue to attract buyers.
The gold net-long jumped by 24%, the equivalent of nearly $9 billion nominal, to 284k lots while funds increased the silver long by 22% to 68k lots, a 30-month high. Gold’s accelerated rally to a seven-year high in the days following the reporting period is likely to have taken the net-long above the previous record of 292k lots. With total holdings in ETF’s backed by bullion also hitting record highs, the combined ETF and fund long reached a record of 112 million ounces last Tuesday.
Funds cut bullish WTI crude oil bets by 27k lots while keeping the Brent long close to unchanged. The latter potentially in response to supply risks from Libya, Russia’s Rosneft and potential OPEC+ cuts.. The Brent long at 283k lots remains some 80k lots above its October low. The WTI crude oil long meanwhile dropped to 95k lots, just 9k above the October low. It’s long/short ratio has on a combination of long liquidation and fresh short selling dropped to 1.80, close to an area that has provided support on several occasions since 2015. Perhaps an early sign of support emerging.
The record natural gas short was cut by 13% in response to cooler U.S. weather temporarily off-setting the continued price weakness caused by the Asian demand shock and a mild winter across the Northern Hemisphere.
Agriculture commodities were mixed with those facing tightening supply receiving additional buying interest. The net-long in CBOT wheat jumped 41% to 65k lots, an 18-month high, the sugar long reached 166k lots, a three-year high. Despite having run of steam the cocoa long nevertheless reached a fresh six-year high while continued coffee selling drove the net-short to a 15-week high.
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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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