Commodities
In commodities, three major themes drove price action during the latest reporting week to 1 September. Crude oil and refined products received a fresh boost from renewed tensions in the Middle East, while escalating Russian and Ukrainian attacks on each other’s agricultural export infrastructure supported key crops, led by wheat. In metals, Kevin Warsh’s hawkish Jackson Hole speech triggered a sharp reversal across both precious and industrial metals as markets increased speculation that the Fed may move closer to a rate hike on 16 September. With the following meeting on 28 October falling just days before the US midterm elections, some investors may also see September as a cleaner window for any policy adjustment, avoiding potential perceptions of political interference.
The result was a 3.5% increase in the Bloomberg Commodity Index, driven by a 7.8% jump in energy, a 7.1% rally in grains and a 3.1% rise in softs, only partly offset by a 6.3% slump in precious metals and a 1.1% decline in industrial metals.
Hedge funds, not surprisingly, responded to these strong moves by adding fresh length across crude oil, with buying in both WTI and Brent, as well as New York-traded gasoline and diesel. Precious metals and copper, meanwhile, saw net selling. Importantly, the reductions in gold, silver and platinum were almost entirely driven by long liquidation rather than fresh short selling. In our opinion, that supports the view that investors regarded the setback as a correction within an established trend rather than the beginning of a more fundamental bearish shift.
Forex
The latest COT forex update covers the week to 1 September, when the dollar bounced back following Kevin Warsh’s hawkish Jackson Hole speech, offsetting earlier weakness triggered by the US Treasury’s bond buyback announcement.
Overall, speculators responded to the dollar rebound by maintaining a broadly unchanged gross dollar long of USD 26.9 billion across eight IMM futures contracts. Looking beneath the surface, however, buying of the euro and CAD, and to a lesser extent the antipodean currencies, was offset by fresh selling of CHF, GBP and, most notably, JPY.
The latter once again wrong-footed speculators, who had built the largest yen short since 28 July ahead of the near 3% rally that followed the reporting period, leaving USDJPY at its weakest weekly close on Friday since February.
Record agriculture long leaves sector vulnerable
Once again, however, the week belonged to agriculture, where strong buying extended into a fourth consecutive week and increasingly raises the question of whether positioning has become vulnerable to a pullback. During the reporting week, the combined managed-money net long across ten major grain and soft commodity futures jumped by 266,000 contracts to a record 1.37 million contracts, the highest since records began in 2006 and representing a nominal value of around USD 53 billion.
Ahead of the roughly 3% pullback that began after the latest reporting period, the aggregate agriculture net long had surged by almost 200% in just four weeks, while the BCOM Agriculture Index rallied to a three-year high. The speed and scale of the build-up highlight an increasingly crowded trade. With positioning now stretched, the sector has become more vulnerable to long liquidation should either the fundamental narrative soften or technical momentum deteriorate.
Record managed-money net longs were reached in corn at 431,000 contracts, soybean meal at 159,000, and cotton at 108,000, while multi-year highs were seen in soybeans, sugar, and not least wheat, which saw particularly aggressive buying, with the CBOT wheat position flipping from a short to the biggest net long in four years as Black Sea supply concerns intensified.
Across the 25 major commodity futures tracked in this report, the combined managed-money net long rose by another 301,000 contracts to 2.16 million, a four-year high and equivalent to a nominal exposure of close to USD 200 billion. That broad increase underlines how rapidly speculative appetite has returned to commodities, while also leaving several markets increasingly exposed should momentum reverse.
