Seasonally, expectations are for continued builds in inventories (following last week’s biggest build in 6 months) but API reported a massive 3.8mm drawdown (against 2.1mm build expectations) sending WTI prices soaring. Distillates also saw a notable draw as Gasoline built modestly. Cushing saw the biggest draw since Feb 2014.
Crude -3.8mm (+2.1mm exp)
Cushing -1.96mm (-1.4mm exp)
As Bloomberg added, “We’ll see what happens with the weekly DOE’s. People will look for confirmation tomorrow about how much refining capacity is offline,” Sam Margolin, energy markets analyst at Cowen & Co., says by phon.
Speculators turned more bearish the euro and less bullish the Japanese yen in the Commitment of Traders week ending October 11. The dramatic shift in US presidential polls and the continued rally in oil appeared to have spurred speculators to reduce short Mexican peso positions and add to longs.
Speculators in the futures market added 20.1k contracts to their gross short euro position, lifting it to 207.8k contracts. There were still a few speculators that tried picking a bottom before the euro slipped below $1.10 in the spot market. The bulls added 8.6k contracts, lifting the gross long position to 114.3k contracts.
The largest speculative gross long and gross short position in the euro. The net short position rose to 93.5k contracts from 82.1k. This is a two month high. However, sterling’s net short position is larger at 95.5k contracts. This slightly smaller than the previous reporting period (-97.6k contracts). This reflected the fact that speculators covered more gross short positions than liquidated gross long positions. Specifically, the 6.4k long contracts were cut while 8.5k short contracts were covered (leaving the gross long position at 50.4k contracts and the gross short position of 145.9k contracts).
Yen bulls move may be having second thoughts in the face of the continued (three consecutive weeks) dollar recovery in the spot market. They liquidated 22.7k contracts to leave a gross long position of 79.3k contracts. The bears were not enticed and added nearly a hundred contracts to the gross short position, which now stands 33.4k contracts. The net long position of 45.9k contracts (down nearly 23k contracts in the latest reporting week) is the smallest in two months.
During the CFTC’s Commitment of Traders week ending October 4, speculators took on risk. Of the sixteen gross currency positions we track, speculators added to their exposure in all but five. Bulls and bears saw opportunity.
The bears were decisive. Of the significant position adjustments (a change in gross position by at least 10k contracts), two were adding to gross shorts (euro and sterling). The New Zealand dollar and Mexican peso were the only two where the bears did not add to gross short position.
The bulls did not extend gross long positions in three of the eight currencies: the Canadian and New Zealand dollars and the Mexican peso. What the disaggregated view reveals is that the New Zealand dollar and Mexican peso were the exceptions to the general pattern. Speculators moved to the sidelines in both currencies. That leaves the 2k contract liquidation of gross long Canadian dollar position to be the sole exception of speculators adding to positions.
The gross short euro position expanded by 11.2k contracts to 187.7k. It is the largest in a month. The gross sterling position jumped 18.4k contract to 154.3k, a new record. It has risen by 31k over the past three reporting periods. A week after the June referendum, the gross short position stood at 94.8k contracts.
The bulls made only one significant adjustment to their currency futures position. It was the Australian dollar. They added 10.7k contracts to lift the gross long position to 73.5k contracts. The gross short position hardly changed, rising 1.7k contracts to 46.9k. The result was an increase in the net long speculative Aussie position too 23.9k contracts from 15.0k. Two weeks ago, the net speculative position was long by 6.8k contracts.
In the week after the BOJ and FOMC meetings, speculators made several significant adjustments to gross positions in the futures market. However, there was not clear pattern.
Of the 16 gross positions we track, five adjustments were more than 10k contracts. Of these five, two were large adds to gross long positions. In the remaining three, speculators cut gross long positions.
The bulls added 12.3k yen contracts to lift their gross long position to 97.4k contracts. It is the largest long position since April. The bears added 2.2k to their gross short position, raising to 28.5k contracts.
Sterling bulls are a fickle lot. After adding almost 29k contracts to their gross long position in the CFTC reporting week ending September 23, they liquidated 21.1k contracts in the most recent reporting period. The gross long position stands at 48.2k contracts. which matches the four-week average (~49.2k contracts).
Yet something more than fickleness appears to be at work. This is the third time this year that there has been a sharp jump in gross long sterling positions followed by a large liquidation the following week. Each occurred around he quarterly expiration. It did not happen last year or the year before. Separately, note that the bears added 8k contracts to lift their gross short sterling position to 135.9k contracts, a new record.
Occasionally around the quarterly expiration, the speculative positioning in the Swiss franc also be comes volatile. In the latest reporting period, speculators cut the gross long franc position by more than half to 12.8k contracts (a 14.5k contract liquidation). The previous week it jumped by 7.2k contracts, or about a third. The gross short position changed by about a hundred contracts. The liquidation of the longs drove the net position from long 8.4k contracts to short 6.0k. Speculators were short francs briefly in August.
Global nickel prices spiked on Tuesday after the Philippines, the world’s top supplier of nickel ore, announced that 20 more metals mines were at risk of being shut down for violating environmental regulations.
The 20 mines, which include the Philippine unit of Australian miner OceanaGold, were ordered to explain why their operations should not be suspended. Environment and Natural Resources Undersecretary Leo Jasareno on Tuesday said most violations were related to siltation, soil erosion, dust emissions and lack of relevant permits.
Jasareno said only 11 of 41 metal mines passed the review, which was conducted from July to August. The government earlier suspended operations at 10 mines for violating environmental regulations.
Suspended mines and those that have been recommended for suspension accounted for 55% of the value of nickel production last year, he said. UBS said shutting three-fourths of Philippine metal mines will cut about 11% of the global nickel ore supply.
There are a few notable exceptions. First, over the past several weeks, speculators have reduced gross short euro positions by more than 20% since the end of July. It stands at 173.3k contracts, after the bears covered 16.7k contracts in the CFTC reporting period ending September 13.
If the bears were pulling back in the euro, they were showing their claws on the Mexican peso. The gross short position rose by 10.4k contracts, after increasing by 22k contracts the previous reporting period. At 85.7k contracts, the gross short position is the largest since April. The net short peso position has more than doubled to 65.7k contracts in the past two weeks.
Although the position adjustments in sterling has been modest, the market has turned and has stopped extending gross and net short positions. Both have fallen for two consecutive reporting period from record levels. The gross short speculative position fell by 5.5k contracts to 123.2k contracts, roughly the same amount that was covered in the previous week. The bottom pickers have slowly entered the market. The gross long position bottomed in mid-July near 28k contracts. It edged up 1.6k contracts in the latest reporting period to 40.1k contracts. The net short sterling position of 82.8k contracts surpassed the euro (net short 81.5k contracts) to have the dubious honor of the largest such speculative position.
Mexico has completed its annual oil hedging programme, considered to be the world’s largest sovereign oil derivatives trade, spending $1.028bn to hedge 250m barrels at a price of $38, the finance ministry said.
The government has run the hedging scheme for a dozen years to provide stability for its public finances, and it said in a statement it would enable it to budget a price of $42 per barrel for public finances in 2017
The government bought put options on its exports, known as the Mexican mix, at $38 per barrel for a total of 250m barrels at a total cost of $1.028bn, or 19.016bn pesos. The hedge was made via 46 operations in international derivatives markets with seven counterparties, the ministry said, but did not name the institutions involved.
The government will rely on a new sub-account within its budgetary income stabilisation fund, known as FEIP, to make up the difference between the $38 hedge and the $42 price to be used for the 2017 budget.
Last year, the government spent about the same amount but hedged oil exports at $49. This year’s lower level reflected the dive in international oil prices.
The summer lull for speculators in the currency futures market continued in the CFTC reporting week ending August 23. Of the 16 gross currency futures positions we track, speculator adjustments were less than 3k contracts in all but three.
The bears added to their gross short sterling position for the eighth consecutive week. The seven hundred contract increase was the smallest of the streak and lifts the gross short speculative position to 130.8k contracts, a new record.
More substantive adjustments were seen in the euro and Mexican peso, where the speculative bears ran for cover. The gross short euro position was trimmed to 182k contracts, as 13.6k contracts were covered. It is the fourth week in a row that shorts were covered. They peaked at 221.8k before the short-covering streak. The speculators covered 14.9k gross short peso contracts, leaving them with 55.4k. It is the third week of short-covering that began with a gross short position of 76k contracts.
Despite the small changes in the gross positions by speculators, two pattern were clear. First, speculators did not reduce the gross long positions in any of the currency futures we track. Second, speculators mostly reduced gross short positions. The exceptions were sterling, as we have seen, and the Australian and New Zealand dollars. We suspect some of the late positioning was caught wrong footed and may help explain the dramatic reaction of Yellen (and Fischer) before the weekend.
While the debate rages whether Yellen was “hawkishly dovish“, hiking in September just to unleash trillions more in QE once the curve inverts even more as a recent Fed staffer paper suggested, or “dovishly hawkish“, waiting until December or even next year, before making another policy error, there was at least some clarity provided by the Chairwoman’s speech, at regard to the Fed’s forecast for where the Fed Funds rate will be over the next two years.
This is what she said:
as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course. Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy. In addition, the level of short-term interest rates consistent with the dual mandate varies over time in response to shifts in underlying economic conditions that are often evident only in hindsight. For these reasons, the range of reasonably likely outcomes for the federal funds rate is quite wide–a point illustrated by figure 1 in your handout. The line in the center is the median path for the federal funds rate based on the FOMC’s Summary of Economic Projections in June.
So where does the Fed expect US rates to be in two years?
“The shaded region, which is based on the historical accuracy of private and government forecasters, shows a 70 percent probability that the federal funds rate will be between 0 and 3-1/4 percent at the end of next year and between 0 and 4-1/2 percent at the end of 2018.”
Earlier today, we showed Barclays’ calculation how, in a market in which there have been a gargantuan $128 billion in stock outflows YTD, the stock market has seen an unprecedented surge higher. The buyers, as Barc calculated, were buyers of index futures, such as central banks (“net buying of US equity futures since March ($60bn notional) has surpassed the amount of buying between October 2011 and May 2013“), corporations buying back stock (“The biggest buyers of equities are corporates themselves with S&P 500 net buybacks rising to $500bn over the last four quarters from $375bn in 2013“), and last but not least: short covering.
As Barclays reported, for S&P 500 stocks, the flow to US equities from short-covering since March has been $60bn, and $26bn since June.
This means that as of this moment, the S&P500 short interest as a percentage of market cap is at three year lows, as most of the weak hands have been flushed out.
The flipside of shorts officially throwing in the towel, is that going forward it will be much more difficult to push stocks higher simply from squeezing shorts or forcing covers. Then again, with short interest at approximately 2.0%, there is still a chance it may fall further. In early 2007, just before the financial crisis emerged, short interest was just above 1.6%. In other words, while going forward the pain for shorts will be substantially lower than over the past year, it may still continue for a while should central banks continue to push everyone into stocks.