COT: Specs rush back into metals; weak crude conviction COT: Specs rush back into metals; weak crude conviction COT: Specs rush back into metals; weak crude conviction

COT: Specs rush back into metals; weak crude conviction

Ole Hansen

Head of Commodity Strategy

Summary:  Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities, forex and bonds during the week to Tuesday, August 29. A week that included the markets' initial, and very positive risk-on response to data pointing to a softening US job market as well as declining consumer confidence. The ‘bad news is good’ reaction was driven by market speculation the Federal Reserve was getting closer to cease its aggressive tightening campaign. Commodities rose strongly with gains seen across all sectors led by precious metals.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities while in forex we use the broader measure called non-commercial.

What is the Commitments of Traders report?

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 main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.

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This summary highlights futures positions and changes made by hedge funds across commodities, forex and bonds in the week to last Tuesday, August 29. A week that included the markets' initial, and very positive risk-on response to data pointing to a softening US job market as well as declining consumer confidence. The ‘bad news is good’ reaction was driven by market speculation the Federal Reserve was getting closer to cease its aggressive tightening campaign. Global and US stock indexes climbed by more than 2%, US bond yields slumped, especially at the front end of the curve, while the dollar traded a tad softer. Commodities rose strongly with gains seen across all sectors led by precious metals. 

Commodity sector:

The Bloomberg Commodity index rose nearly 2% on the week as the market responded to China’s efforts to support its property sector, stock market and currency, and not least the prospect of a US peak rate being brought forward. Both developments supporting the metal sector, both industrial and precious. The energy sector continued its week-long advance with prolonged production cuts from Saudi Arabia and its allies continuing to tighten a market that has yet to witness a slowdown in demand. Finally, the agriculture sector, except for wheat, all traded higher led by soybeans, and not least the softs sector where sugar added 8.8% and cocoa 4.8%.

Hedge funds and CTAs responded to these developments by increasing their overall net long across 24 major commodity futures by 18% to 1.08 million contracts, with demand being led by WTI crude oil, gold, silver, platinum and soybeans, while selling was concentrated in a few contracts, led by Brent, natural gas and wheat.

Crude oil and fuel products: Hedge funds gave a lukewarm response to crude oil’s renewed rally with buying of WTI, primarily due to short covering, being partly offset by net selling of Brent. Overall, the comb. net long at 390k contracts, remains some 20% below the February peak when crude traded lower, overall leaving funds ill prepared for additional upside momentum.
Gold, silver and copper: An ongoing rally in gold and silver was turbocharged by peak rate speculation, and it forced a strong short-covering response from funds. The gold net long jumped 126% to 58k, silver added 16k to 17.5k while a record 18k lots of platinum buying flipped the position back to a net long. The HG copper net short was cut by 58% to 6.3k in response to improved signals from China.
In grains, buying was led by soybeans (+33k to 91k) as prices hit a one-month high on hot weather concerns. In corn the net-short was trimmed by 19k to 87k while wheat (-9k to -80k) selling extended to a fifth week.
Softs & Livestock: A 5% softs sector jump was led by strong gains in sugar (8.8%) and cocoa (4.8%) and speculators responded by adding length to all four contracts, especially sugar (+31k to 168k) and cotton (+11k to 38k). Cocoa prices near a 2011 record high supported fresh buying (+8k to 75k) with the net long just 8k below the 2013 record.
In forex, buying of dollars versus eight IMM futures extended to a fifth week, cutting the gross short by one-quarter to $10 billion, a ten-week low. All IMM contracts expect MXN saw net selling led by EUR ($1.6bn equivalent), GBP ($0.8bn) and AUD ($0.4bn). The bulk of the remaining dollar short is held against the EUR ($20bn) while the biggest long is against the JPY ($8.5bn)
US bond futures: Weeks of leveraged fund selling showed signs of reversing as peak rate speculation drove a reversal in yields across the curve. Buying was concentrated in 2’s, 10’s and not least T-Bond Ultra, the most shorted part of the yield curve. Overall, the DV01, the value of a 1bp move was reduced by $17 million to $429 million.


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