Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Head of Commodity Strategy
Summary: Futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, April 13. A week where elevated risk appetite, courtesy of a weaker dollar and softer Treasury yields, helped drive stock markets higher and volatility lower. In commodities however, the first net buying in seven weeks was concentrated in energy and a few agriculture contracts while gold and copper saw net selling ahead of last Thursday's technical breakouts.
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 indices up until last Tuesday, April 13. A week where elevated risk appetite, courtesy of a weaker dollar and softer Treasury yields, helped drive stocks and commodities higher, while the VIX dropped to a 14-month low. The reporting week ended before the surprise drop in US yields to a one-month low, a move that helped support multiple technical breakouts in commodities, most noticeable oil, copper and gold.
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Money managers turned net buyers of commodities for the first time in seven weeks. The combined net long across 24 major commodity futures contracts, however, rose by less than 1% to 2.28 million lots with buying of crude oil, natural gas, sugar and corn being somewhat offset by selling of gold, soybeans, platinum and copper.
The reporting week ended just before multiple technical breakouts in oil, copper and gold, continued grain market strength, and renewed demand for soft commodities saw the Bloomberg Commodity index jump the most since December to reach a near three-year high.
Energy: The combined crude oil long in WTI and Brent crude oil rose 31k lots to 661k lots as speculators added to fresh longs while cutting short positions. The reporting week ended before an upbeat monthly oil market report from the International Energy Agency and the weaker dollar helped push prices above their recent trading ranges.
Latest on crude oil from our daily Market Quick Take:
Crude oil futures (OILUKJUN21 & OILUSMAY21) closed above their recent ranges on Friday, but with global virus cases hitting new records, the prospect for a sustained rally at this stage seems limited. Not least considering last week's rally, apart from strong economic data from the U.S. and China, was based on assumptions for a strong recovery in global fuel demand into the second half of 2021. With the prospect of additional barrels over the coming months from OPEC+, Iran and the U.S. we see the upside potential in Brent crude limited to $70/b until vaccine rollouts significantly changes the demand dynamics.
Metals: Gold’s inability to build on the previous weeks strong rejection below $1680 – now a double bottom – helped trigger a 16% reduction in the net-long to 64.8k lots. Again, just like oil, the reporting week ended before Thursday’s technical breakout above $1765, a development that is likely to have attracted fresh fund buying from momentum and trend following strategies.
Latest on gold from our daily Market Quick Take:
Gold (XAUUSD) ticked higher in Asia overnight after closing above the key resistance-turned-support area at $1760-65/oz on Friday. While the dollar trades a bit firmer U.S. Treasury yields remain soft with 10-year real yields back below –80 bp for the first time in six weeks. Partly driven by a continued rise in global corona virus cases worldwide supporting safe havens like Treasuries and gold. Continued focus on dollar and yields as well as geopolitical developments between the U.S. and Russia. Important resistance levels, using Fibonacci, at $1785 (double top) and $1818.
The copper net-long was cut by 20% to 38.2k lots, a nine-month low, and down 58% from last Octobers peak. The reporting week did not include the price jump that followed the publication of a research note from Goldman Sachs in which they forecast copper rising by more than 60% by 2025.
Agriculture: The corn net-long increased to a fresh 11 year high and at 402k lots the position represents 37% of the total net long across the whole agriculture sectors 13 different futures contracts. While speculators have been adding to their corn position, they have been selling soybeans and wheat. As a result the combined net long has remained almost unchanged for the past six months at 530k lots with corn now accounting for 60% of that long position.
In soft commodities, the Arabica coffee net long more than doubled in response to price supportive reports pointing to a rising supply deficit due to adverse weather in Brazil, the world’s largest producer of quality beans.
Speculators continued buying (short covering) of dollars almost came to a halt last week. Following three months of near non-stop buying, the dollar short against ten IMM currency futures and the Dollar Index dropped to $5.2 billion, down 86% from the mid-January peak at $37 billion. Only small changes was seen with the most noticeable being Sterling, which despite trading lower saw a 28% increase in the net-long to a one-month high.
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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