Head of Commodity Strategy
Summary: Hedge funds continued, despite recovering prices, to reduce exposure to key commodities during the week to February 11. The selling activity was most pronounced in crude oil, natural gas, copper, corn and coffee while gold, sugar and cocoa saw continued demand.
Saxo Bank publishes two 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.
Hedge funds continued to reduce bullish commodity bets during the week the February 11. Four weeks of aggressive selling has cut in half the net-long exposure in 24 major commodity futures to 648k lots. The continued selling during the latest reporting week occurred despite a backdrop of recovering prices across some of the recently hardest hit commodities from energy (ex. natural gas) to copper and soybeans.
In crude oil the combined net-long in WTI and Brent was cut by 78k lots to a three months low at 406k lots or 406 million barrels. Since the January 10 peak at 714k lots the combined net-long has now been cut by 43% on a combination of the gross-short rising by 90% to 212k lots while the gross-long has been cut by 25% to 618k lots. RBOB Gasoline’s 5% rally helped attract 7k lots of fresh longs while natural gas’ continued slide saw the net-short reach a fresh record of 309k lots.
Gold buyers returned to increase the net-long by 8% to 229k lots. While total holdings in exchange-traded funds backed by bullion continue to reach new record highs, the futures net-long has held within a 200-300k range since last July. Hedge funds maintain an elevated bullish position but are currently reluctant to add more amid the confusing signals from the wider market. While being supported by negative real yields and COVID19 growth worries investors also have to consider the fact that U.S. stocks continue to grind higher and now also renewed dollar strength.
Despite advancing by 1.6% during the reporting week, HG copper selling nevertheless continued with funds increasing their net-short by 26% to 59k lots. Since the COVID19 outbreak became known funds sold 66k lots during a three-week period and these positions are now being exposed to short-covering as the market responds positively to Chinese pledge to support the economy. With much of China still off-line there will be a demand shock which may limit the upside potential until the scale of the disruption becomes known.
Having broken back above $2.60/lb the short-term risk, baring any renewed worries related to COVID19, could see copper trade towards its 200-day moving average at $2.67/lb.
Grains led by soybean oil and corn continued to be sold while soft commodities were mixed. Both the price of and the net-long in sugar reached 3-year highs before the rally ran out of steam just below 16 cents/lb last week. The cocoa net-long jumped to a six-year high amid continued efforts by top producers Ivory Coast and Ghana to boost growers income. Hedge funds’ love/hate affair with Arabica coffee continued. Following a six-week sell-off and a 30% price slump they finally turned net-short last week. Only to see the price jump by 10% on renewed supply concerns in Brazil, the worlds biggest grower.
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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.
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.
