Head of Commodity Strategy
Summary: The Commitments of Traders report covering positions held and changes made by money managers in the week to June 16 found broad reductions in bullish bets amid worries around a re-acceleration of the COVID-19 cases. The biggest reductions occurred in WTI crude oil, natural gas, copper, wheat and coffee while gold, corn and sugar attracted fresh buying and short-covering.
Saxo Bank publishes two 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.
This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, June 16. During a week where appetite for risk temporarily received a knock amid worries around a re-acceleration of COVID-19 cases and continued uncertainty around the speed of the U.S. and the global recovery.
The S&P 500 ended the reporting week down 2.4% while the yield on U.S. ten-year notes reversed lower to their established 0.6% to 0.8% range. Speculators almost doubled their dollar short despite seeing the Dollar Index rise by 0.7% while the Bloomberg Commodity Index lost 1.5% with all but five of the 24 futures contracts tracked in this update being sold. Overall the net-long was cut by 8% with the biggest reductions seen in WTI crude oil, natural gas, copper, wheat and coffee while gold, corn and sugar attracted fresh buying and short-covering.
Energy: WTI crude oil’s ten week run of rising long bets paused with speculators cutting their net long by 27k lots to 354k. This during a week where U.S. petroleum inventories reached a fresh record. It was however a relative small reduction considering the 255k lots funds had added since early April. With the net long in Brent holding steady at 185k lots traders are likely to have concluded that the recent weakness was nothing more than a long overdue correction and not a reversal.
Also a sign that the market, at least for now, assumes that rising COVID-19 cases or a second wave will not be met with the same draconian lockdown measures seen back in March. Thereby supporting the narrative of a continued recovery in demand and with that higher prices. If the momentum can be carried into this week, the market is likely once again to focus on closing the price gaps ($41.05 on WTI and $45.18 on Brent) left open following the Saudi price war declaration back on March 8.
Bullish natural gas bets were cut by 41% as the price suffered a near 9% loss with demand cuts from milder weather and a pandemic related drop in LNG exports weighing on the market.
Metals: Buyers returned to gold for the first time in four weeks with the net long at 143k lots still close to a one-year low. It was one of the few commodities benefiting from the temporary risk off that hit other markets during the week. With GCc1 ending last week at $1753/oz, the second highest weekly close in this cycle, the stage has been set for a potential fresh attack from bulls over the coming weeks. Unless hedge funds have moved strategic long futures positions to the currently buoyant ETF market, a breakout is likely to force them back into the market after having halved bullish bets since February. Our latest thoughts on gold can be found in our Commodity Weekly from last Friday.
The risk off sentiment that benefited gold helped drive a 35% reduction in recently established copper longs. Silver meanwhile saw a 17% increase in bullish bets with the net at 28k lots still some 60% below the February peak.
During the coming week the market will be watching some key levels in order to gauge the strength of the latest attempt to break higher. Spot gold is this Monday morning at the current level ($1752/oz) on track to record its highest daily close since 2012. For a breakout to occur the price however needs to move above the May 18 high at $1765.50.
Silver meanwhile has yet to break any significant levels with a break above $18.50/oz needed for it to attract enough momentum to potentially challenge the 2019 and Feb-20 highs. Also watch the gold-silver ratio for relative strength between the two metals. Following the recent silver weakness which saw the ratio move from 94.5 to back above 100 it is trading lower to to 98 (ounces of silver to one of ounce of gold) this Monday.
Agriculture: Buyers returned to corn for the first time in three months as the slow price recovery seen since early April finally started to yield short-covering and fresh buying. A rising global stock pile of wheat helped drive the price of CBOT wheat back below $5/bushel and the net-short above 30k lots to a 13 month high.
Cocoa and coffee meanwhile are showing no signs of the V-shaped recovery shown via the strong performance in stocks and general appetite for risk. Coffee has dropped below $1/lb in its longest slump in 10 months as a record Brazilian production and a weak Brazilian real meet muted demand from out of home demand through restaurants and coffee shops. Demand for cocoa, which is closely linked with GDP growth has dropped to a two-month low amid mounting worries that the slowdown will hurt demand. Last week both saw increased selling from funds with the cocoa position switching back to a net short while bearish coffee bets reached the highest since last November.
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
