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 25. A week where a steady dollar, near a four-month low, and lower bond yields, led by reduced inflation expectations helped send volatility down and stock markets higher. The reporting week also caught the impact of the recent correction in commodities, especially in metals and grains.
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 highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, May 25. A week where a steady dollar near a four-month low, and lower bond yields, led by deduced inflation expectations helped send volatility down and stock markets higher. The reporting week also caught the backend of the recent correction in commodities, primarily due weaker industrial metals on Chinese intervention fears and a sharp correction in grains.
Commodities
The Bloomberg Commodity index dropped 1.9% during the reporting week to last Tuesday, with heavy losses in industrial metals (-4.2%) and grains (-5.2%) offsetting continued gains in precious metals and livestock. In response to these developments, hedge funds cut bullish bets across 24 futures contracts by 6% to 2,286k lots, a six-week low. With the exception of gold and WTI crude oil selling was broad with the biggest reductions seen in natural gas, Brent crude oil, HG copper, soybeans and corn
Energy: Speculators bought WTI crude oil (+18k lots) and sold Brent (-27.5) thereby leaving the combined net down 9.5k lots on the week at 624k lots, the lowest since January. The increase in WTI bets was driven by a rising US fuel demand ahead of the Memorial Day weekend that kicks of the country’s summer driving season, the lowest gasoline stockpiles in almost three decades together with crude stockpiles at Cushing, the WTI delivery hub, some 17% below the five-year average. Brent, the global benchmark, meanwhile saw net selling due to the risk of rising Iranian production together with virus outbreaks in Asia curbing demand.
Latest: Crude oil futures led by WTI (OILUSJUL21) remain supported as the U.S. summer driving season begin, while Brent (OILUKAUG21) continues to struggle breaking above $70 ahead of another round of Iran nuclear negotiations and Tuesday’s OPEC+ meeting where the group is expected to confirm an already agreed 0.8 million barrels per day increase for July. Until the market receives more clarity about the outcome of these, the upside potential beyond the March high at $71.40 seems limited.
Agriculture: The grains sector suffered another week of big price corrections and reductions in bullish bets. Led by soybeans, corn and to a lesser extent wheat, the combined net-long dropped 10% to a seven-month low at 412k lots, with the CBOT wheat position once again returning to almost flat.
Metals: Gold buying extended into a fourth week with the net long rising by 20k lots to a four-month high at 126.9k. It is worth noting that most of last weeks change was driven by a 27% reduction in the gross short position to the lowest since last July. Another sign that long term trend systems, the largest position holders in the trend system universe, continue to scale back short positions, thereby providing a constant bid in the market. Especially after the price broke the downtrend from the August high and after the price recently recovered back above its 200-day moving average.
Bullish HG Copper bets meanwhile slumped 35% to 33.9k lots, the smallest bet on rising prices since last July. The main culprit behind the reduction and copper’s recent 9% correction being China’s attempt to curb commodity prices and hoarding in the domestic market. An attempt both Goldman Sachs and Citigroup expect will fail due to the speed of the rebound in demand in advanced economies, particularly the U.S.
The current gold rally has left both platinum and silver trailing, and during the week both metals saw net selling, most noticeable being the 17% reduction in the platinum net long to a 5-1/2 month low at 14.6k.
Latest: Gold (XAUUSD) is heading for its biggest monthly gain since July as inflation remains the key focus, while Bitcoin at the same time is heading for its worst month since 2011. The recovery in ETF holdings backed by bullion and fund positions in futures remain subdued, a sign that many investors remain unconvinced about the short to medium term direction. However, Friday’s failed downside attempt could indicate that constant bidding and short covering from long term trend systems are ongoing. Focus this week on Friday’s job report and whether gold can break above $1923, the 61.8% retracement of the August to March correction. Key support at in the $1845-55 area.
Forex
In forex, the flow in the week to May 25 was skewed toward continued dollar selling as the Bloomberg Dollar Index came within a whisker of the January low before seeing a small recovery in the days that followed the reporting period. Following six weeks of continued selling the Greenback short against ten IMM currency futures and the Dollar Index reached a three month high at $16.8 billion. There was some small selling of AUD and CAD but overall buyers had the upper hand, notably in euro (4.1k lots or $0.6bn equivalent), sterling (5.8k or $0.5 billion) and CHF (3.1k or $0.3bn).
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:
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
