Head of Commodity Strategy
Summary: Futures positions held and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, March 16. A reporting week that ended the day before the FOMC meeting caused renewed across-market uncertainty after it failed to reassure traders and investors on fears that yields and inflation will continue to rise. Key takeaways were an elevated oil long into last weeks collapse, renewed demand for gold and a halving of the dollar short.
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, March 16. A reporting week that ended the day before the FOMC meeting caused renewed across-market uncertainty after it failed to reassure traders and investors on fears that yields and inflation will continue to rise. However, during the reporting week markets were well behaved with the S&P 500 rising 2.3% and the VIX falling by 4%. The dollar traded softer, commodities were mixed while yields on US 10-year Notes climbed 9 basis points to 1.62%.
Commodities
Speculators cut bullish commodity bets for a third week, but overall it was a mixed bag with no clear thread seen across and within the three sectors. Half of the 24 commodity futures tracked in this were sold, led by natural gas, wheat and copper while buying among the other half was concentrated in corn, gold and the three fuel contracts. Overall the net long was cut by 2% to 2.5 million lots to the lowest exposure since the week to December 22.
Energy: Speculators increased bullish WTI bets by 2.3k lots to 393k lots, a fresh 32-month high while the Brent long (-5.8k lots to 334k) was cut for a second week. Overall the combined net long held steady for a fifth week at 727k lots, just days before plunging the most since September on stalling vaccine rollouts, rising bond yields triggering reduced risk appetite and IEA saying speculation about a oil super-cycle is premature. However, concerns about OPEC+ action to stem the slide and both WTI and Brent successfully bouncing from their 50-day moving averages helped reduce the risk of further technical hedge fund selling. Continued buying of refined fuel products lifted the net long in gasoline, distillate and gas oil to a 14-month high at 194k lots.
Natural gas’ continued warmer weather slump, down 20% during the past month, triggered another week of aggressive long liquidation in four Henry Hub deliverable futures and swap contracts. In just three weeks funds have sold 144k lots, bringing the net down to an eight-month low at 212k lots.
Metals: Buyers returned to gold for the first time since January after it managed to find support within the important $1670-85 band of support. The 30% jump in the net long to 54.7k lots was driven by a combination of new longs (5.9k) and 7k of short covering. These developments unfolded before the post-FOMC recovery when the market stepped up its focus and hedging activity against the risk of rising inflation. Elsewhere the silver long was reduced by 6%, platinum buying lifted the net long by 11% while HG copper selling extended into a fourth week resulting in the net long being cut to just 45k lots, an eight month low.
Agriculture: Grains and softs, with the exception of corn and cotton saw mild net selling. Overall the total net long in grains was only reduced by 0.4% to 743k lots, and the sector maintain a near record long exposure ahead of the March 31 US Prospective Planting report which may set the tone into the planting and growing months. Wheat, both the soft and hard red winter variety saw a combined 19k lots reduction 56k lots as it continue to be least wanted of the three major crops.
Forex
Dollar short covering accelerated last week with the net short against ten IMM currency futures and the Dollar Index being almost cut in half to $12.3 billion, the least bearish dollar position since last June.
Speculators sold a whopping 46k lots or $5.3 billion equivalent of yen futures, thereby flipping the position to a net short for the first time in a year. This was the largest weekly selling of yen since 2011 and interestingly it occurred during a week where the yen traded rangebound and only finished down 0.5%. The euro long was cut by 12k lots ($1.8 bn) to 90k lots, and since the August 2020 record peak it has now been reduced by 58%. Selling was seen in all but nine of the ten currency pairs with other major changes being a 31k lots ($0.7 bn) reduction in the MXN long and 11k lots ($0.8 bn) in NZD.
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:
2024: The wasted year
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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.
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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.
