Head of Commodity Strategy
Summary: This update highlights futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, January 26. A week that saw fresh commodity buying while global stocks continue their stimulus fueled rally. All of this unfolding just before the buying attack on some of the most shorted US stocks triggered some major hedge fund losses and with that, the risk of contagion to the wider market.
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, bonds and stock indices up until last Tuesday, January 26. A week that saw global stocks continuing their stimulus-fueled rally while vaccine rollouts continued to off-set an increased number of lockdowns. Also in China where in addition a chill swept through financial markets after the central bank withdrew cash over growing worries about the risk of liquidity driven asset bubbles in the stock and property market. The S&P 500 and Nasdaq both reached record highs while the dollar and bond yields drifted lower and commodities rose.
These developments, however, all unfolded just ahead of last weeks 61% spike in the VIX index driven by the biggest one-day drop in stocks since October. US 10-year bond yields briefly returned to 1% while dollar shorts got squeezed. All in response to weaker company earnings, and not least after the buying attack on some of the most shorted US stocks triggered some major hedge fund losses and with that, the risk of contagion to the wider market.
Commodities
Speculators increased bullish commodity bets by 4% to 2.6 million lots, a fresh record, representing a nominal value of $133 billion. All sectors except softs saw net buying led by cattle, Brent crude oil, soybean oil, corn and gold while the limited amount of selling was concentrated in WTI crude oil and sugar.
Table
Forex
A mixed week in forex resulted in a small net reduction in the dollar short against ten IMM currency futures and the Dollar index. The reporting week ended last Tuesday, the day before the shenanigans in heavily US shorted stocks helped reduce risk appetite thereby supporting the Greenback. Overall the dollar short was reduced by 2% to $36.1 billion, with buying of EUR, CAD and MXN being more than offset by CHF and JPY selling.
Financials
The Cboe VIX net short reached a one-year high at 137k lots last in the week to January 26. One day before volatility spiked by 61% in response to disappointing earnings and deleveraging caused by heightened speculative trading in heavily shorted stocks.
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:
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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