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COT: Euro and metals dumped ahead of FOMC

Ole Hansen

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 a dramatic week to June 14, the day before the FOMC delivered its first 75 basis point rate hike. Stocks tumbled while treasury yields and the dollar surged higher. Commodities tumbled with losses seen across all sectors on rising growth risks with losses led by natural gas, and industrial metals.


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.

This summary highlights futures positions and changes made by hedge funds across commodities and forex during a dramatic week to June 14, the day before the FOMC delivered its 75-basis point rate hike. In the run up to this event, global markets had been spooked by another strong US inflation print which helped send global stocks to a 10% loss, Yields on US ten-year treasury notes jumped by a whopping 0.5% while the dollar rose by 3.2% against a broad basket of currencies. Bitcoin tanked by 30% while commodities tumbled with losses seen across all sectors on rising growth risks.

The latest across-market updates, including crude oil and gold, can be found in our daily Financial Market Quick Take here 

Commodities
The commodity sector suffered one of its biggest weekly reversals in recent months with the prospect for accelerated central bank action to curb runaway inflation inadvertently driving down demand as global growth begins to suffer. The Bloomberg Commodity Spot index traded lower by 7.5% with losses recorded across all sectors, most notably energy, led by a 22% decline in natural gas, and industrial metals where copper suffered a 6% decline.

Speculators responded to these dramatic developments by cutting bullish bets in 15 out of 24 major commodity futures by 7% to 1.6 million lots, a 22-month low. Biggest reductions seen in natural gas (30k), sugar (-32k), gold (-20k), WTI crude oil (-19k) and cocoa (-18k).

Energy: Managed money accounts cut their combined bet on rising crude oil prices for the first time in six weeks. The small 8.3k lots reduction was driven by a 18.9k lots reduction in the WTI net long with profit taking emerging following another failed attempt to break resistance in the $123 area. In Brent, a similar problem finding a path through resistance around $124 did not prevent another week of buying with the net long rising 10.5k lots to 239k, a fifteen-week high.

Natural gas took a 23% hit after the Freeport LNG explosion cut US exports by close to 20% for at least three months. The price slump drove a 47% reduction in bullish bets held across four Henry Hub deliverable futures and swap contracts to a two-year low at 34k lots.

Metals: The yo-yoing price behavior, seen across precious and industrial metals during the past couple of months continued last week when broad weakness helped attract fresh short selling and long liquidation. In gold the net long was reduced by 29% to 49.5k lots, a nine-month low with the reduction primarily driven by short sellers lifting short bets to an eight month high at 72k lots. Silver, which has increasingly been troubled by weakness across other industrial metals saw its net long cut by 76% to 1.8k lots. Platinum followed suit with 8.5k lots of selling flipping the position back to a net short.
 
HG copper has seen a sharp reversal since - as it turned out - China's premature reopening hopes supported an early June surge to $4.58 per pound. Since then the risk of prolonged lockdowns and rising recession risks elsewhere has triggered a sharp reversal lower culminting on Friday with the lowest close in 14 months just below $4/lb. Speculators have struggled holding the correct position during the recent market gyraation.  From the biggest net short in two years on May 17 at 18k lots to a 7k net long on June 7 before flipping back to a net short last week as the latest weakness forced another turnaround. Developments highligthing a very low conviction rate and with that elevated volatility as positions are constantly adjusted. 

Agriculture: While most of the 13 food commodity futures tracked in this update saw net reductions in speculative length, the bulk of the selling was concentrated in sugar and cocoa with buying of corn and live cattle partly offsetting an overall 41k lots reduction.

Forex
The dollar index which tracks a basket of currencies, jumped 3.1% in the week to June 14, after another strong US inflation print saw US Treasury yields soar ahead of last Wednesday’s FOMC meeting. Speculators responded to these developments by selling a record 56.6k lots (€7 billion) of euros, driven by a combination of long liquidation (-23.3k) and fresh short selling (33.3k), all resulting in the net flipping back to a small net short of 6k lots.

Besides heavy selling of MXN, the other major currencies tracked in this were bought, not least the JPY on speculation that the Bank of Japan could be considering removing the 0.25% yield ceiling on ten-year JGB’s (a move that did not materialize following Friday’s BoJ meeting). Overall, a dramatic week in forex, which also saw the dollar index net long reach a five-year high at 44.4k lots and the CAD switch back to a net long, but which ended up yielding only a relatively small 18% net increase in the combined dollar long to $18.7 billion.

What is the Commitments of Traders report?

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:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

 

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