Head of Commodity Strategy
Summary: The COT reports published weekly by the US CFTC highlight futures positions and changes made by hedge funds across commodities, forex and financials. In the latest reporting week to March 29, the stock market saw continued gains, despite the risk of an economic slowdown being signalled through flattening yield curves. The dollar traded sideways for a third week while the Bloomberg Commodity Spot index lost 1.5% on the week, thereby pairing back some of the exceptional strong gains that helped sent the sector towards its strongest quarter in many decades
This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, March 29. A week that saw continued gains across US stocks and with that a drop in the VIX index to an early January low. A fragile rally in the sense the US yield curve continued to flatten, with the 10-2 year spread dropping by 19 bp to 2 bp, thereby signaling heightened risk of an incoming economic slowdown. The dollar traded sideways for a third week with strength across key commodity currencies and the euro being offset by JPY and GBP weakness.
Commodities
The Bloomberg Commodity Spot index lost 1.5% on the week, thereby pairing back some of the exceptional strong gains that helped sent the sector towards its strongest quarter in more than 100 years. Losses being led by the energy and grains sectors in response to Russia/Ukraine peace talks and worries about the short-term demand outlook in China, where Shanghai emerged as the epicenter of China’s worst virus outbreak since the early days of the pandemic.
Weekly losses in 17 out of the 24 major futures contracts tracked in this drove a broad reduction across all sectors. The agriculture sector, however, was mixed with selling of grains being partly offset by demand for softs and livestock.
Energy: Speculators, spooked by loss of bullish momentum due to Chinese demand worries, Russia/Ukraine peace talks and a flattening US yield curve signaling heightened growth risks, cut their combined long in WTI and Brent by 13.5k lots to 411k lots, and just above the 400k lots low from December. This just days before President Biden announced a 180 million barrels release from strategic reserves which helped send crude oil towards its biggest weekly loss in more than ten years. The 30-day volatility across the energy sector jumped to 64.5%, more than double the 2021 average, thereby highlighting a market that remains difficult to trade.
Metals: Selling of gold extended to a third week, albeit at a slower pace following the 175 dollar early March correction. During the past three weeks short-term momentum driven hedge funds have cut their net length by 46k lots to a six-week low at 130k lots. With total holdings in bullion-backed ETFs rising by 2.9 million ounces or 29k lots during the same period, it highlight the current battle between short and long-term investment strategies. The latter being driven by worries about the growth outlook, a prolonged period of inflation forcing strong Fed action and with that the risk of a policy mistake. In addition, a general uncertain outlook for stocks and bonds driven demand for diversification.
Silver, platinum and palladium also saw net length being reduced while rangebound copper attracted 5k lots of fresh buying.
Agriculture: A 5% drop in the BCOM grains index, triggered long liquidation in all six contracts with the 54.6k lots reduction being led by soybeans and corn. Some of the action most likely being driven by traders adjusting positions ahead of Thursday’s Prospective Planting report, the first survey-based glimpse into potential harvest outcomes for the upcoming US growing season.
Forex
Speculators bought dollars for a third consecutive week to March 29, resulting in the net long against ten IMM currency futures and the Dollar Index rising by 21% to an eleven week high at $18.3 billion. The Japanese yen received most of the attention, reaching a seven-year low against the dollar on rising yield differentials after the Bank of Japan offered to purchase 10-year bonds in unlimited amounts to defend the 0.25% yield target. As a result the JPY net short jumped 22.6k lots to a four-month high at 102k lots. The Aussie dollar, one of the strongest currencies during the past month, remained surprisingly the second most shorted currency after the JPY, and after another weekly gain it only saw a small 1.6k contracts reduction in the net short.
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:
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
