Head of Commodity Strategy
Summary: This COT report highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, January 18. A reporting week that ended with a deepening selloff in stocks as bond yields continued to climb and where commodities continued do attract demand drifen by tightness in energy, industrial metals and some soft commodities
Daily Market Quick Take
Daily Saxo Market Call Podcast
This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, January 18. A reporting week that ended with a deepening selloff in stocks as bond yields continued to climb on speculation the Federal Reserve will have to boost interest sooner and by more than previously expected. Treasuries fell along the curve, pushing yields up to levels last seen before the pandemic shook the markets nearly two years ago. The dollar held steady while commodities continue to attract demand with tightness in energy, industrial metals and some soft commodities shielding the asset class from being caught up in the risk aversity seen elsewhere.
Commodities
The Bloomberg Commodity Index rose 1.3% during the week, with strong gains in energy and softs, and to a lesser extent metals offsetting another week of losses across the grains sector. These developments helped drive 51k lots of net buying across 24 major commodity futures from large speculators, bringing the total net long to a two-month high at two lots. Buying was concentrated in WTI crude oil, gas oil, natural gas and cocoa with net selling mostly impacting the grains sector.
Energy: Speculators continued their rapid accumulation of length in crude oil futures and during the past four weeks, the net buying of WTI and Brent reached 155k lots, a rapid four-week accumulation of this magnitude was last seen in January 2020, just before the pandemic temporary sucked the life out of the market. The combined net long reached a ten-week high at 559k lots or 559 million barrels with WTI buying of 23.7 lots offsetting a small 2k lot reduction in Brent. Even though it was small, the reduction in Brent may signal fading belief in its short term ability to break above $90, a level that was almost reached during the week.
Metals: The gold net long was reduced for a third week, albeit at a slower pace. The 4% reduction to 84.5k was primarily driven by fresh short-selling from funds fading the rally towards $1830, a recent resistance level now turned support. Silver’s emerging relative strength which during the week saw the gold-silver ratio drop by 3.4% helped drive a 33% increase in the net long to 23.8k lots, a seven-week high. Copper’s one percent weakness did not deter traders, as they increased their net long to near a three month high at 28.2k lots. In platinum, the net short was reduced by 62% to just 1.3k lots.
Agriculture: Speculators reduced length in soybeans and corn while wheat was mixed with buying of Chicago and selling of Kansas. In softs, cocoa and coffee saw strong buying interest. Despite rallying by 3% the net long in sugar kept falling to reach a 19-month low., thereby making it a potential strong recovery candidate with surging fuel prices raising the prospect for increased bio-fuel production. Cotton's 4.4% jump only attracted a small amount of additional buying from funds seeking to get involved in the commodity with the highest roll yield, currently around 20% on a one-year basis.
Forex
In forex, speculators responded to the latest stock market weakness by aggressively selling dollars. Against ten IMM currency futures and the Dollar Index the net dollar long was reduced by 30% to a four month low at $16.5 billion, and the most aggressive week of dollar selling since June 2020. All of the major IMM futures contracts with the exception of CHF got bought, led by EUR where 18.6 lots of buying tripled the net long to 24.6k lots. The Sterling short was removed following 29k lots of buying while the CAD position flipped to a net long of 7.5k lots after speculators bought a total of 14.9k lots.
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
