Morning Call: US bond market sees bearish reversal
US and global markets closed last week in what Saxo Head of FX Strategy John Hardy terms 'a bad state,' with a reversal in the US Treasury market and a soft US jobs report among the key signals.
Head of Commodity Strategy
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Hedge funds increased bullish bets across 24 major commodities by 14% to 936,442 lots during the week to July 31. According to the latest data from the Commodity Futures Trading Commission and the Intercontinental Exchange, the sectors seeing most of the increase were energy led by gasoline and grains led by corn and wheat. The net-selling of metals was solely driven by gold, with both silver and copper being bought. Soft commodities with the exception of cotton remained under pressure.
The combined net long in WTI and Brent crude oil remained close to unchanged for a third consecutive week. This as trade war and growth/demand concerns continued to off-set the potential bullish impact of supply disruptions related to Iran and Venezuela. Last week, a reduction of 5,383 lots in WTI was off-set by a rise of 4,706 lots in Brent crude oil. The current lack of direction was highlighted in Brent where both long and short positions were reduced.
Hedge funds continued to sell gold with the net-short hitting fresh records. The 51% jump in the net-short was primarily driven by another jump in the gross-short to 153,596, also a record. A strong dollar, not least against the Chinese yuan, and a continued focus on rising US rates, robust US stocks, and a lack of inflationary pressures have all conspired to reduce gold’s appeal as a safe haven and diversification product.
The selling continued to be concentrated against gold with silver – despite it's being as weak as gold – seeing a 41% reduction in the net-short last week. The current net-short of just 6,678 lots is just 17% of the record set three months ago.
HG copper was bought for a second week after support was established below $2.70/lb. Selling pressure driven by escalating trade tensions and signs of a softening Chinese economy has at least for now been offset by potential supply disruptions from Chile where strike action at the world’s largest mine is looming.
Platinum saw its net-short being cut by 5% as the white metal continued its recovery. Not least against gold where the discount has fallen by $40 during the past month to $380 currently.
The recent surge in global wheat prices due to drought and adverse weather in some of the major growing regions helped more than double bullish bets on CBOT wheat last week. A 50,000+ net-long was last seen during the 2012 season when the US was hit by drought and wheat jumped above $9.4/bu, much higher than the current price of $5.55/bu.
Wheat’s rally together with emerging weather concerns for corn helped support a 60% reduction of the net-short while Chinese import tariffs on soybeans continued to hurt investor sentiment.
Sugar, cocoa, and coffee all remained under pressure from ample supply. Continued weakness last week resulted in fresh lows and continued selling, not least in sugar and cocoa. Funds have struggled to hold the right position in cocoa amid the roller coaster rise and fall seen so far this year. Following a 30% since the April peak, funds have yet to turn neutral with last week’s 45% reduction taking the net-long down to 13,163 lots.