Head of Commodity Strategy
Summary: Futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, May 11. A week where renewed inflation fears ahead of U.S. CPI pushed the S&P 500 to a one-month low, the dollar lower and US 10-year breakeven yields to a fresh multi year high. The commodity sector which reached a ten-year high saw emerging buying fatigue as money managers sold into the rally, especially in some of 'hot' commodities such as corn and copper.
Saxo Bank publishes 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.
The below summary and attached report highlight futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, May 11. A week where renewed inflation fears ahead of Wednesday’s U.S. CPI pushed the S&P 500 and the interest rate sensitive Nasdaq to one-month lows. Slightly higher ten-year Treasury yields meanwhile disguised a precious metal friendly drop in real yields as breakevens jumped to a fresh eight-year high at 2.54%. Commodities surged higher with broad gains in metals and agriculture driving the Bloomberg Commodity Spot Index up 2.4% to a ten-year high. Interestingly the continued rally helped attract profit taking, especially in some of the hot commodities such as crude oil, corn and copper.
Commodities
Despite seeing the Blomberg Commodity Spot index rally to a fresh ten-year high with +4% gains recorded in 9 out of 24 major futures contracts, money managers instead opted for a small reduction in bullish bets to 2.5 million lots representing a nominal value of $150 billion. The most noticeable net selling hitting crude oil (45k) and corn (56k) while buyers concentrated their efforts in gold (29.5k), the soybean complex (16.8k), natural gas, gas oil together with sugar and cocoa.
Energy: Crude oil’s range bound behavior together with lower US demand due to the Colonial pipeline hack driving a slump in refinery runs, as well as ongoing virus worries in Asia helped drive a 45k lots or 6.4% reduction in the combined WTI and Brent crude oil long to 656k lots, a five-week low. Despite struggling to keep up with surging metal and agriculture markets, the reductions were mostly driven by long liquidation and only a limited amount of fresh short selling, something that otherwise could signal increased risk of a reversal. Gas oil traded on the ICE exchange saw strong buying for a third week with the net long reaching 138k lots, a 31-month high.
Metals: Copper’s 5.3% surge to levels beyond the 2011 record took was met by profit taking from money managers who instead of buying into strength, as they often do, opted to reduce their net long by 8% to 61k lots. Whether this action from the some of the brightest minds signal a short-term peak in the market remains to be seen.
The combination of a weaker dollar and falling real yields – on rising inflation expectations – helped drive a 45% increase in the gold net long to 95.6k lots, a 13-week high. Having traded within an uptrend since early April, gold will be facing key resistance next week in an area between $1845 and $1855 where three major technical indicators converge.
Latest: Gold (XAUUSD) trades above its 200-day moving average to challenge trend line resistance from the August high, today around $1858. A break signaling a potential extension to $1876, the 50% retracement of the August to March correction. A slightly stronger dollar being more than offset by lower Treasury yields following Friday’s disappointing U.S. retail sales. Broad weakness across the crypto space potential playing a part as well as the “store of value” label is being challenged.
Agriculture: The grains sector reached an 8-1/2 year high before suffering a major end of week setback after the monthly WASDE report projected lower corn exports and slightly higher production of all three major crops leading to higher new crop stock piles. Just like copper, corn traders chose to sell into the 3.7% rally thereby cutting their net long by 15% to 316k lots. Overall the combined net long in the three crops dropped to the lowest since December, thereby reflecting a distinctive cooling attitude to a rally which temporarily went parabolic.
Forex
Broad dollar selling, which saw the Bloomberg Dollar Index down 1.2% on the week, helped drive a fourth weekly increase in the speculative short against ten IMM currency futures and the Dollar index. Last week’s 25% increase to $15.4 billon primarily benefitted the euro (9.1k lots), CAD (12.7k) and GBP (8.3k). Elsewhere the CHF position flipped back to a net short while the BRL position in response to a 4.1% price jump turned net long for the for first time in 21 months.
Financials
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:
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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.
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.
