Head of Commodity Strategy
Summary: This summary highlights positions and changes made by speculators such as hedge funds and CTA's across commodities, forex, bonds and stock index futures and options up until last Tuesday, December 1. A week where continued risk-on mood powered global stocks higher driven by the forceful combination of a vaccine-led boost to global growth next year and the prospect for additional U.S. stimulus to mitigate an ongoing surge in Covid-19 cases.
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 index futures up until last Tuesday, December 1, a week that was shortened by the U.S. Thanksgiving holiday. The risk-on mood nevertheless powered global stocks higher with the S&P 500 and Nasdaq Composite both closing at record highs. Driven by the forceful combination of a vaccine-led boost to global growth next year and the prospect for additional U.S. stimulus to mitigate an ongoing surge in Covid-19 cases. Ten-year bond yields rose 5 basis on raised inflation expectations while the dollar dropped to a 2-1/2-year low.
Commodities
The Bloomberg Commodity Index traded lower with profit taking in energy, grains and softs being partly off-set by a broad metals rally. The net result of these developments was a net increase in the speculative long across 24 major futures contracts by 1% to 2.3 million lots, the highest since February 2017.
For a second week buying of energy and metals, both precious and industrials, more than offset continued profit taking across the agriculture sector. The top three buys were all found in the energy sector led by WTI crude oil and natural gas while corn, wheat and sugar saw the biggest reductions.
Energy: Despite pre-OPEC+ meeting jitters and slightly lower oil prices, the combine net long in Brent and WTI oil rose by 6.5% to a five-month high at 577k lots, primarily on short-covering. The natural gas long rose by 5%, again on short covering, just before the price slumped by 10% on doubts about winter demand.
Metals: Gold and silver buyers returned following the Thanksgiving holiday slump and subsequent bounce back. The small 3% increase in both was however dwarfed by platinum where a 5% price rally helped trigger a 35% increase in the net long to a fifteen week high at 14,388 lots. Copper’s renewed surge to a 7-1/2-year high drove a relative small response from speculators who lifted their net long by 5,729 lots or 7% on a combination of fresh longs and short covering.
Agriculture: Long liquidation in the grains sector extended to a fifth week with the total reduction of 51,079 lots being the biggest since May 26. The CBOT wheat position swung back to a net short after seeing the price slump by 6.5% while the corn net-long was further reduced after hitting an eight year high last month. The soft sector was mixed with the sugar long being reduced by 8% to an eight-week low. The recent shenanigans in cocoa which saw the price temporarily spike by 400 dollars helped attract additional buying, most of which is likely to have been sold back out in the days that followed last Tuesday’s cutoff.
Forex
Broad dollar weakness in the U.S. holiday shortened week to December 1 helped drive a 5% increase in the combined dollar short against ten IMM currency futures and the Dollar Index to $26.9 billion, a six week high. The change was primarily driven by a 54% reduction in the Sterling short to 7,899 lots and an 18% increase in the JPY long to a four year high at 47,503 lots.
Somewhat off-setting these developments were a 26% increase in the CAD short to 21,243 lots and a doubling of the AUD short to 10,800 lots. The EUR was bought for a second week and despite reaching a 2-1/2-year high against the Greenback, the net long at 139,894 was still some 34% below the record from August at 211,752 lots (€26.5 billion)
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:
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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.
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