Head of Commodity Strategy
Summary: The COT reports published weekly by the US CFTC highlight futures positions and changes made by hedge funds across commodities and forex during the latest reporting week to last Tuesday, April 19. A holiday shortened Easter week that saw stocks trade higher ahead of the oncoming storm signaled by a sharp rise in yields and stronger dollar. A fresh record in the BCOM triggered minimal response with speculators showing concerns about China and the growth outlook.
This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, April 19. A holiday shortened Easter week that saw stocks trade higher despite fresh warnings being signaled through rising bond yields and a stronger dollar. In the days that followed, tough talking by Fed officials helped send yields and the dollar even higher as the market started pricing in 250 bps of Fed hikes this year, potentially raising the risk of the FOMC delivering 75 bps hikes.
Commodities
The Bloomberg Commodity Spot index reached a fresh record high during the reporting week with strength in energy, led by diesel and natural gas, and grains offsetting losses in precious metals and softs. Hedge funds potentially troubled by the prospect for rising yields and China lockdowns killing growth and with that demand held their net length close to unchanged with most of the buying concentrated in crops, resulting in a near record long across major six grains and oilseed contracts.
General comment from today's Market Quick Take:
Commodities across all sectors, led by metals are under pressure this Monday as the focus shifts from Russia sanctions-led supply angst to demand destruction due to already high prices, expectations for an aggressive US rate hike cycle killing growth, and not least continued lockdowns in China which have spread from Shanghai to Beijing. The Bloomberg Commodity Spot index jumped an unprecedented 24.5% during the first quarter and after hitting a fresh record last week, the shift in focus may trigger an oversized correction. Positions held by investors and speculators are mostly geared towards higher prices, something we may not see until China gets on the other side of the outbreak and the impact of central bank rate hikes are being analyzed.
Agriculture: The risk of a global food crisis caused by weather worries and the risk of a sharp reduction in this year’s Ukraine production, helped underpin the grain and soybean sector. Overall the sector net long, which includes six crop futures, reached a ten year high at 819k lots with buying concentrated in soybean oil and corn. The bullish belief in higher prices can be seen in the long/short ratio with readings of 43 longs to 1 short in soybeans and 33 to 1 in corn highlighting a sector with literally no short positions left. A development, despite strong fundamental support, has left the sector exposed to a speculative sell out should the mentioned general commodity sector weakness continue.
Across-the-board reductions were seen in softs, most notably coffee where the net long at 29.6k lots stood at half the 60k lots record from mid-March. Four weeks of sugar buying paused with the net down 1% to 236k.
Energy: The combined net length in Brent (+27.3k lots) and WTI (-14.5k) crude oil rose by 12.8k lots to 414k lots, thereby highlighting a continued lack of interest in positioning for higher prices. The prospect for very tight market conditions due to sanctions on Russia and OPEC producers struggling to meet their production targets, have in recent weeks been offset by the release of oil from strategic reserves, prolonged lockdown in China and central banks stepping up efforts to lower inflation by killing demand through higher rates.
Despite falling domestic stocks of gasoline and especially diesel as well as robust exports, the WTI net long dropped to a two-year low at 240k lots, primarily driven by long liquidation.
Metals: Gold’s failed attempt in challenging $2000 and subsequent correction triggered another round of long liquidation from technical and momentum driven leveraged funds. The net long has cut by 19.7k lots to 125k, thereby surrendering most of the gains seen during the previous week. Small selling of silver as well as copper concluded a general negative week for the metals week.
Forex
Continued dollar strength in the holiday shortened Easter week to April 19 lifted the Bloomberg Dollar Index by 1% but failed to boost speculators overall appetite for dollars, with flows more about the crosses. Overall, the combined dollar long versus ten IMM currency futures and the Dollar index held steady near a five-week low at $14.5 billion. Selling of euro and Sterling being offset by demand for CHF, JPY and CAD while the net flow in AUD and was tiny.
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
