Head of Commodity Strategy
Summary: This COT report highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, January 4. A week where a rout in tech shares dragged US stocks from all-time highs on worries about higher interest rates amid a rout in US bonds. The commodity sector traded higher, primarily supported by the industrial metal and soft sector, with the best individual performances being crude oil, soybeans, coffee and cotton.
This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, January 4. A week where a rout in tech shares dragged US stocks from all-time highs on worries about higher interest rates amid a rout in US bonds. These developments unfolding ahead of the release of FOMC minutes last Wednesday, the day after this reporting period ended.
In terms of market action around New Year the Nasdaq lost 1.3% while the higher concentration of value stocks saw the S&P 500 trade close to unchanged. The dollar held steady while US ten-year yields jumped 17 basis points to 1.65%.
Commodities:
The commodity sector traded higher, primarily supported by the industrial metal and soft sector, with the best individual performances being crude oil, soybeans, coffee and cotton. Somewhat offsetting these were losses in natural gas, palladium, wheat and sugar.
Speculators reaction to these developments were relatively muted, most likely due to the time of year with books barely reopened before the reporting week ended last Tuesday. Overall the energy sector saw buying led by Brent crude oil and gasoline. Metals were mixed with gold selling being offset by silver buying, the platinum short was halved while copper length rose by 27%.
The agriculture sector saw strong demand for soybeans in response to Brazil crop worries while ample supply saw the CBOT wheat short rise by 69% to a six-month high. In softs, selling of sugar took the net long to a 17-month low while the 7% increase in the cotton long lifted the long/short ratio to a very unhealthy 151 longs per each short.
Latest comments from today's Market Quick Take:
Crude oil (OILUKMAR22 & OILUSFEB22) trades steady with focus on robust demand and so far, a limited fallout from the omicron surge, together with the prospect for OPEC+ struggling to deliver the promised production hikes as several producers have started to hit their limit, some due to lack of investments. Countering the short-term threat of even higher prices are easing supply disruptions in both Libya and Kazakhstan, but overall, demand remains robust as signaled in the six-month futures spread in Brent which has more than doubled since the December, omicron demand worry low point. Focus this week on EIA’s STEO and US CPI, as well as omicron developments, especially in China where the zero-tolerance approach may hurt demand through lockdowns.
Gold (XAUUSD) had a relatively strong first week of trading with the massive 30 bp surge in US ten-year real yields to a six-month high at –0.78% being partly offset by a softer dollar and stocks as well as geopolitical risks, and rising inflation as seen through higher wage pressures in Friday’s US job report. Yields have climbed further overnight with the market starting to price in four Fed rate hikes in 2022, starting as early as March. Silver (XAGUSD) meanwhile continues to find support around $22 ahead of the key double bottom at $21.42 while resistance can be found at $22.65. Gold remains challenged as long it stays below the triple top at $1830 and so far, $1783 has prevented an even deeper selloff.
Forex
In forex, the speculative flows were mixed resulting in the combined dollar long against ten IMM currency futures and the Dollar index holding steady at $23.2 billion, with buying of EUR, CHF and GBP being offset by selling of JPY and AUD.
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:
2024: The wasted year
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
