Head of Commodity Strategy
Summary: Futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, September 14. A week that saw continued weakness in stocks raising the question of whether we are at the cusp of a long awaited correction. Risk adversity gave the dollar a small boost while yields traded softer. Commodity speculators responded to these developments by cutting exposure across most markets with crude oil, copper and gold being the few exceptions
This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, September 14. A week that saw continued weakness in stocks raising the question of whether we are at the cusp of a long awaited correction, or whether it was once again third-week weakness in the run up to monthly options expiries. On Friday the S&P 500 closed below its 50-day SMA for the first time in three months with eyes this week on the FOMC meeting and China, and how the government will handle the Evergrande crisis which has payments due on two notes this coming Thursday.
Emerging risk aversity during the reporting week supported a small bid in the dollar while lower-than-expected CPI helped support a 10 basis point drop in US ten-year notes.
Commodities
The Bloomberg Commodity Spot index hit a fresh ten-year high led by surging natural gas prices together with strength in crude oil, copper and gold. However, despite net-buying of these by hedge funds, the net speculative length across 24 major futures fell to near a one-year low driven by continued selling across the agriculture sector and investors dumping platinum-group metals (PGM).
Energy: Money managers increased their crude oil exposure in WTI and Brent for a third week by a total of 44k lots to a six-week high at 595k lots. With the bulk of the increase being driven by fresh longs, and only a limited amount of short covering, the risk of a short-term price pull back has emerged. Losses have accelerated this Monday as crude oil trades lower in response to China demand worries, a continued recovery in US production and a stronger dollar ahead of this week's FOMC meeting sapping investor demand. Last week the rally was halted at $76, the July 29 high, and more importantly it has raised the question whether current and improving fundamentals are strong enough to warrant a push abovetrendline resistance from the 2008 record peak, currently at $77. We don’t believe they are, therefore, leaving the market at risk of a short-term pull back, initially towards the 21-day moving average $72.75.
Natural gas which jumped by 15% during the week to reach a 7-year high did not see any fresh buying with surging volatility instead forcing traders to cut exposure. The reduction in both long and short positions left the net across four Henry Hub deliverable swap and futures contracts down 1,213 lots to 263k lots.
Metals: Biggest changes hit the Platinum Group Metals, which in response to an ongoing semiconductor chip shortage in the automobile industry has witnessed a change in the short-term demand outlook. Adding to this, the often poor liquidity in these minor metals, and the result was a 16% slump in palladium and 6% drop in platinum during the reporting week. Speculators acted accordingly be flipping their palladium position to a net short for only the second time since at least 2009 while an existing platinum short increase by 130% to 16k lots, now the biggest in terms of lots and notional value across the 24 major markets tracked in this report.
Ahead of Thursday's sell of in gold and silver speculators had responded to the recovery from the August slump by adding a small amount of gold length while in silver they reversed course and cut longs by 21%. The HG copper long meanwhile reached a six-week high.
Latest: Gold dropped to a five-week low overnight with treasury yields rising on taper jitters ahead of Wednesday’s FOMC meeting, and as the dollar received a haven bid following another day of stock market losses led by Hong Kong and its troubled property sector. The short-term question is whether investors, despite taper angst, will return to bonds as they seek a safe harbor while the stock market correction potentially gathers pace. Hardest hit has been silver and platinum, both overnight touching their lowest levels since November, with the economic growth outlook challenged on multiple fronts. Not least in China where iron ore, a key input to its steel industry has more than halved in just a few months, and overnight in Singapore it slumped an additional 9% to $93 as China steps up restrictions on industrial activity in some provinces.
Agriculture: The grains sector saw continued broad selling despite an unchanged Bloomberg Commodity Grains index. The soybean long reached a 13-month low, corn a nine-week low while the wheat position flipped back to a net short.
A similar picture was seen in soft commodities with the exception being cotton where a 15 week non-stop buying spree saw the net long reached a 40-month high at 92k lots. Combined with news on Friday that top shipper US sees global sales cooling down helped send the price below key support, thereby raising the risk we have entered a period of long liquidation and lower prices.
Forex
A week of general risk reduction where both short and long positions got reduced, resulted in a second week of net dollar selling. Against ten IMM currency futures and the Dollar index, the combined dollar long was reduced by 7% to $11.4 billion. The outlier of the week being sterling which flipped back to a net long after speculators bought a net 29k lots, the equivalent of $2.5 billion, other currencies seeing net buying was euro and yen. Reducing the overall negative impact on the net dollar position, was selling of CAD, CHF and not least the Aussie dollar, which is now challenging the yen as the biggest short position.
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
