Head of Commodity Strategy
Summary: Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to Tuesday, January 17. A week that saw continued dollar weakness attract fresh selling from speculators while a strong rally in the Bloomberg Commodity Index on China demand optimism helped lift longs across all sectors, not least in crude oil, copper, gold, corn and soybeans. Wheat, coffee and natural gas remain the most shorted contracts leaving them exposed to an upside reaction should the technical and/or fundamental outlook turn more price friendly.
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:
Gold’s continued rally, this reporting week by 1.8%, helped attract continued demand and short covering from hedge funds. A seventh consecutive week of buying saw the net long rise by 11k contracts to 93.3k contracts, a nine-month high. Silver, which despite support from a weaker dollar and rising industrial metal prices only saw 3.4 contracts being added, bringing the net long to 28k contracts.
Copper, one of the best performing commodities this month, attracted another 6.5k contracts of buying, lifting the net long to a nine-month high at 35.2 contract. The last two weeks have seen the strongest accumulation of length by funds since October 2021 and while China provides the fundamental reason for buying, the positive price action has also fed a great deal of speculative momentum buying. The PGM’s meanwhile saw net selling as prices of both platinum and palladium fell. The net long in platinum slumped by 31% to 16.9k contacts as the discount to gold raced higher to reach 865 dollars, compared with 750 at the start of the year.
The impact of the January 10 World Agriculture Supply and Demand Estimate report (WASDE), which showed support for corn and soybeans, helped lift the BCOM Grains Index by 4.1% during the week to January 17. With gains primarily being driven by soybeans and corn, those longs received a strong boost; soybeans by 28% to 168k contracts and corn by 28% to 192k.
In a week where prices of the Chicago and Kansas wheat contracts rose by 2.8% and 5.4% respectively, funds continued to sell into those gains. Chicago wheat together with Arabica coffee together with US natural gasare now the two most shorted commodities. Representing a nominal value of around $2.4 billion, the wheat short at 65k was the most elevated since May 2019 while in coffee the 40.5k contract – a 34% jump on the week – was the highest since November 2019.
Another soft commodity that increasingly has fallen out of favor among funds is cotton, which during the reporting week saw a 2.3% price drop drive 11k lots of net selling, resulting in the net flipping to a net short of 2k lots for the first time since May 2020.
In forex, the U.S Dollar Index (DXY) reached a nine-month low as broad selling of the greenback continued. Speculators meanwhile responded mixed to this development but overall, the gross short against nine IMM forex futures and the Dollar Index rose 23% to $5.7 billion, with buying of JPY, GBP and CAD more than offsetting a week that saw profit taking emerge in the euro.
Ahead of last Wednesday’s Bank of Japan meeting, the Japanese yen net short was cut by 12.4k contracts (One contract equals ¥12.5 million) to just 23k lots, a 22-month low and a 78% reduction from the late October peak above 100k lots. The EURUSD reached a nine-month high, but several days of failing to break above€108.75 probably helped trigger some light profit reducing the net long by 8k lots (One contract equals €125,000) to 127k contracts.
The U.S. Dollar Index meanwhile has seen almost continued long liquidation since hitting a five-year high last June at 45k contracts (One contract equals $1000 times the index value). During the latest reporting week, the net length was reduced further to just 13k contracts, an 18-month low.
2024: The wasted year
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.
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.
