Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
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 7. A week where the S&P 500 showed signs of running out of steam, the dollar traded unchanged after having dipped to a one-month low while Treasury yields rose ahead of fresh supply. The Bloomberg Commodity index traded softer with broad losses, especially across metals and agriculture being only partly off-set by post-Hurricane Ida gains in fuel and natural gas.
This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, September 7. A week that saw the tech-heavy Nasdaq hit a fresh record while the S&P 500 showed signs of running out of steam in response to a slowing macro environment, not least following a surprisingly soft US payrolls report.
The dollar traded unchanged after having dipped to a one-month low following the weak jobs report. In bonds, 10-year Treasury yields rose 6 basis point ahead of a bumper auction to challenge key resistance 1.38%. The Bloomberg Commodity index traded softer with broad losses, especially across metals and agriculture being only partly off-set by post-Hurricane Ida gains in fuel and natural gas.
A challenging week for most sectors, apart from energy, helped drive a 4% reduction in the speculative length held by funds across 24 major futures contracts. The reduction reduced the net long to 2 million lots, the lowest level since last November. Once again, the agriculture sector led by grains suffered the biggest amount of selling while investment metals traded mixed with rising Treasury yields and a recovering dollar hurting gold. The energy sector received a boost from Hurricane Ida with supply disruptions supporting fuel products as well as natural gas.
Energy: Speculators actions during a holiday-shortened reporting week were primarily dictated by the impact of Hurricane Ida which forced a sharp reduction in output of crude oil and gas from platforms in the Gulf of Mexico. Onshore the hurricane slammed into the Louisiana coastline, causing widespread disruptions to refineries through flooding and power cuts.
During the reporting week, the impact on crude oil was limited with production cuts being offset by lower demand from refineries. Speculators responded to these developments by adding only a small amount of length, primarily in Brent where 5.5k lots of net buying was driven by short-covering. The buying interest instead turned to fuel products, and not least natural gas where the risk of an already tight market turning even more tight helped boost both the price and the speculative interest.
Latest: Crude Oil (OILUSOCT21 & OILUKNOV21) trades near the top of its recent range in response to a very slow recovery in US production following Hurricane Ida, and after Vitol said Asian demand would ‘come roaring back’ in Q4. Almost half the crude production from the US Gulf of Mexico has yet to be restarted with the loss of barrels so far exceeding 30 million. In Brent, a break above $73.7/b could see it challenge the July 29 high at $76.15/b next, while support remains the 21-day moving average at $71/b. Focus this week on monthly oil market reports from OPECtoday and the IEA on Tuesday.
Metals: Gold’s sixth rejection above $1830 since July combined with a recovering dollar and rising bond yields, helped drive a 16% reduction in the speculative length to 83.5k lots. Silver, which managed to break higher, was bought for a third week with funds increasing the net long by 44% to 17.9k lots. Platinum remains one of the few contracts, apart from soybean meal, where funds hold a net short position. During the week it was increased by 31% to 7.1k lots as the metal was dragged lower by palladium which dropped to a one-year low.
HG copper weakness during the reporting week failed to attract any fresh selling with the price stuck in a range before Friday’s spike to a one-month high above $4.4/lb.
Agriculture: The grains market saw heavy selling of all three crops on a combination of pre-WASDE adjustments and Hurricane Ida disrupting exports, just as the harvest was about the begin. Overall the sector long was cut by 20% to 364k lots with the soybean long slumping to a 13 month low at 57.5k lots while the biggest change in terms of lots was corn which saw a43.6k lots reduction.
The softs sector was mixed with selling of sugar and coffee, while cocoa and cotton were bought. Buying of the latter extended into a 14th week with the net long reaching the highest level since May 2018.
Latest: Grains witnessed a very volatile Friday following the release of the monthly WASDE report from the US Department of Agriculture. The headline numbers, showing a bigger-than-expected rise in corn and soybean stockpiles, initially sent prices lower before recovering strongly in response to the agency boosting its forecast for exports,and the fact most of the findings had already been accounted for by the recent selloffs. Corn (CORNDEC21) led the turnaround, jumping 5.3% before settling higher by just 1.5%.
A mixed bag of flows saw strong buying of euros (15.8k), mostly due to short covering, and NZD (6k) more than offset selling of most other currencies, most noticeable sterling (-9.6k) and AUD (-10.4k). The net result being a small 4% reduction in the dollar long against ten IMM currency futures and the Dollar index to $12.3 billion.
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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