Head of Commodity Strategy
Summary: Futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, September 21. A week that registered the biggest stock market slide in four months as traders grew increasingly worried about China Evergrande Group's debt problems, as well as pre-FOMC market jitters. As a result the dollar long jumped as speculators looked for shelter while the net long across 24 major commodity futures dropped to a 13-month low, despite seeing the sector trading at a near 10 year high.
This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, September 21. A week that registered the biggest stock market slide in four months as traders grew increasingly worried about China’s crackdown on the real-estate sector, and the potential fallout from China Evergrande Group’s debt problems.
In response to these developments, which included the market adjusting positions ahead of the FOMC meeting, the S&P 500 lost 2%, the dollar saw broad strength while US 10-year yields climbed four basis point. The risk to Chinese growth, the general risk aversity and the stronger dollar helped send the commodity sector lower by 2.1% with losses seen across all sectors led by energy and metals, both precious and industrial.
Commodities
The Bloomberg Commodity index lost 2.1% on the week, with broad selling across all sectors reversing some of the gains that recently had taken the index to a ten-year high. Most of the 24 commodities except crude oil, gas oil, platinum and sugar traded lower on the week, and in response to these developments money managers cut their long positions by 140,456 lots to a 13-month low at 1.87 million lots. Net selling was seen across all sectors led by natural gas (-53.5k), gold (-25.8k), silver (-13.2k) and copper (-13.3k). Selling across the agriculture sector extended into a fifth week, albeit at much slower pace than in recent weeks.
Energy: The reaction in crude oil to a week of general commodity weakness was mixed with speculators selling of WTI (-10k lots) being more than offset by the 21k lots of Brent buying. Speculators have been net buyers of crude oil for the past four weeks and prices now hovering near three-year highs, the combined net long at 606k lots or 606 million barrels is remains some 131k lots below the latest peak from June. The increased volatility in natural gas was being felt as with the 9% correction during the week triggering a 20% reduction in the net long held in four Henry Hub deliverable futures and swap contracts to 209k lots, well below the July peak at 366k lots.
Latest: Crude Oil (OILUSNOV21 & OILUKNOV21) continues higher as the global energy crunch that started in the gas, coal and power market has spread to crude oil as users around the world start to switch fuels. Together with a vaccine-led rise in demand, Hurricane Ida related supply disruptions, and OPEC+ not being able to deliver the promised production increases, these developments are likely to underpin prices into the northern hemisphere winter. WTI trades above $75 while Brent at a fresh three-year high is closing in on $80, with Goldman Sachs lifting its year-end forecast by $10 to $90. In addition, the monthly Brent chart shows a break above the downtrend from the 2008 record high, potentially signaling a move to the October 2018 high at $86.75. Increased focus on OPEC+ and their October 4 meeting.
Agriculture: The grains sector saw continued selling, albeit at a slower pace than recent weeks. The soybeans complex was hardest hit once again with the soybean net long falling to a 13-month low at 49.7k, a far cry from the 238k lots reached last October. Small amounts of buying was seen in corn and wheat, with the overall combined net long in the three major crops falling to a one-year low at 259k lots, and down 55% from the May peak.
The softs sector was mixed with sugar and cocoa selling being joined by cotton, where the net long after 16 weeks of buying was cut by 12% to 81.2k lots. Coffee bucked the trend as net buying increased the long by 5% to 38.4k lots.
Metals: Speculators are increasingly not positioned for a potential bounce in precious metals after making deep cuts last week, most notable in silver where the net long collapsed by 94% to just 900 lots, a 27-month low, while the gold long was reduced by 30% to 61.6k lots. The heavy rounds of long liquidation driven by a stronger dollar, China Evergrande worries as well as pre-FOMC jitters. HG Copper was also sold with the net long seeing a 37% reduction to just 22.8k lots, a four-week low. Platinum, one of the most shorted commodities currently, received a small boost driven by a combination of short covering and fresh longs being added.
Latest: Gold trades unchanged after finding support in the $1745 area last week. With real yields and especially the dollar not providing any support currently, the small bounce seems to be driven by continued Evergrande angst and the global energy crunch which is spreading from gas and coal to crude oil, and which in our opinion could reignite the reflation trade, thereby supporting gold at a time where bonds' safe-haven status is challenged given the prospect for early tapering. Focus this week on EU CPI and US PCE data as well as US stimulus package and debt ceiling.
Forex
Broad dollar strength in response to broad risk adversity driven by China and Evergrande uncertainties, saw the flow being substantially skewed toward dollar buying. Overall the dollar long against ten IMM currency futures and the Dollar Index jumped by 39% to $15.8 billion, a 21 months high. All the major currency pairs except JPY were sold with the most notable flows being sales of euros (-15.8k lots or $2.3bn eq.) and CAD (-18.6k).
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
