COT: Rising yields cut dollar shorts and commodity longs

COT: Rising yields cut dollar shorts and commodity longs

Ole Hansen

Head of Commodity Strategy

Summary:  Futures positions held and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, March 9. A week that saw 10-year US bond yields climb to 1.53% and the dollar rally to a four-month high. Speculators meanwhile cut bullish commodity bets for a second week with yield and dollar sensitive metals such as gold seeing the biggest reductions.


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, March 9. A week that saw 10-year US bond yields climb 13 bp to 1.53% and the dollar rally to a four-month high. Gold and other interest rate and dollar sensitive commodities suffered in response to the yield rise primarily being driven by real yields rising 11 bp with breakeven yields only accounting for the remaining 2 bp. In stocks, the rotation to value from momentum continued with the S&P 500 trading flat while the Nasdaq dropped by 2%. The Bloomberg Commodity index traded flat with losses in metals being off-set by energy.

Commodities

Speculators cut bullish commodity bets for a second week with rising yields and a stronger dollar  triggering some risk adversity. The combined net long across 24 major futures contracts was reduced by 4% to 2.6 million lots, representing a nominal value of $129.2 billion. Once again the metal sector led by gold and copper saw the biggest reductions followed by several agriculture commodities led by sugar, cotton and soybean oil. Investor demand for crude oil continued to fade despite another strong rally while natural gas longs slumped by 14% on warm weather developments. 

Energy: Crude oil’s +7% rally in the week to March 9 that was partly driven by a temporary risk spike following the attempted attack on Saudi oil installations, only triggered a small 2.8k lots net increase in the combined crude oil long in WTI (+7.6k) and Brent (-4.8k). During the past four weeks a 12% rally in crude oil has triggered no additional increase in the combined net long which currently stands at a 2-1/2-year high at 731k lots. While rising US bond yields and the stronger dollar has lowered investment appetite, these developments also support our view that crude oil has reached a level beyond which can be hard to justify given current fundamentals.

A two-week record draw in US fuel stocks, following the Texas freeze disruption, helped attract net buying in both gasoline and distillates. A natural gas price slump on warmer weather driving less demand triggered a 14% reduction in the net long to 284k lots.

Metals: Speculators cut bullish gold bets for a sixth straight week, the longest slump since 2017. Rising yields, a stronger dollar and economic stimulus eroding safe-haven demand has driven the net-long to a near two-year low at 41.9k lots and 85% below the latest 285k peak from February 2020. Gold’s close inverse correlation with US ten-year real yields showed signs of breaking on Friday afternoon when gold managed a relative strong close despite rising yields. For now, however, gold remains caught in a downtrend with key support being an important area between $1670 and $1690 while buyers are in no rush to enter longs before it manages to regain $1765/oz.

Copper’s temporary slump below key support at $4.04/lb helped trigger a 14.3k lots reduction in the net long to a seven month low at 51.2k lots. In just three weeks funds have cut bullish bets by 41% with rising yields and dollar together with rising stock levels in China forcing long liquidation. An interesting development for a metal that enjoys strong fundamental support but also one that highlight most money managers have a price and momentum focus.

Agriculture: The grains and soy sector saw a small 6k lots reduction during a week that ended with a monthly supply and demand report from where a US government. A report that turned out to be somewhat disappointing to the bulls after it failed to trim forecasts for domestic inventories while upgrading estimates for world stocks. Money managers, however, remain very bullish the sector and since last October have maintained a record long in wheat, corn and soybeans around 550k lots, the bulk of which stems from a 357k lots long in corn.   

From Reuters: Expanded position limits for CBOT grains point to volatility
Expanded speculative position limits for agricultural futures scheduled to go into effect on Monday could eventually add to market volatility as commodity funds are allowed to build larger bets on market direction, analysts said. Futures exchange operator CME Group, parent of the Chicago Board of Trade, is expanding position limits in wheat, corn, soybeans and other commodities following a final rule published in January by the U.S. futures regulator, the Commodity Futures Trading Commission.

Forex

Continued dollar strength helped accelerate short covering during the week to March. The combined dollar short against ten IMM currency futures and the Dollar Index dropped to a four month low following an 18% reduction to $24 billion. The primary force behind the reduction was a continued pairing of euro longs after speculators sold 24k lots to bring the net long down to an eight-month low at 102k lots. They  also sold 12.7k lots of JPY to a one-year low at 6.5k lots, 4.3k lots of CAD and 2.2k lots of GBP with a small offset coming from the buying CHF and AUD.

Financials

Positions in U.S. bond market futures split between the three main groups of participants

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 reasons why we focus primarily on the behavior of the highlighted groups 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

 

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992