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What is the Secured Overnight Financing Rate (SOFR)?

The Fed-induced recessions

By Dan Steinbock

After unwarranted trade wars, a pandemic depression, proxy wars, energy and food crises, global economic prospects will be further penalized by the US Federal Reserve’s aggressive hikes and collateral damage worldwide.

From early 2020 to early 2021, the Fed funds rate had been at 0.25%. Though the inflation rate in the US slowed for the third month to 8.2% in September 2022, it remained above market forecasts.

The energy index increased almost 20%, while the increase in the cost of food (over 11%) was close to its highest since 1979. Moreover, the core rate which excludes volatile food and energy, rose to 6.6%, the highest since August of 1982, and above market expectations. Inflationary pressures remain elevated (Figure).

Figure US Inflation and interest rate

Source: TradingEconomics, DifferenceGroup

Recently, the Fed raised the rate to 3.75%-4%. It was a sixth consecutive hike and the fourth straight three-quarter point increase, pushing borrowing costs to a new high since 2008.

Downplayed risks

Since the onset of 2020, the Fed has made two cardinal mistakes. Ignoring the WHO’s warnings about the international spread of the Covid-19, it began to cut rates only belatedly in March 2020. The second mistake ensued after mid-year 2021, when inflation started to climb rapidly. Instead of a timely response, the Fed chairman Jerome Powell downplayed the threat of soaring prices calling them “transitionary.”

Despite multiple red flags since then, the rate hikes’ net effects continue to be underestimated. Last January, I warned that US inflation is the global risk of 2022. Until then, the Fed had largely ignored soaring inflation. Due to the belated response, I expected the ensuing risks to penalize the ailing global recovery.

In February, after the disastrous failure of international diplomacy over Ukraine, I cautioned that global recovery is fading and the world economy must cope with the risk of stagflationary recession.

In the first week of March, I predicted that the unwarranted proxy war in Ukraine would “severely penalize Ukraine, Russia, the US and the NATO, Europe, developing countries and the global economy” which would compound the threats of energy and food inflation.

The Fed’s rampage toward 5%

In September, I predicted that US inflation and aggressive rate hikes are pushing the West into recession territory, while collateral damage is derailing development elsewhere.

As I projected then, the Fed was preparing another 75-point hike, followed by another 50-points hike. That would take the year-end rate to 4.5%.

What next? While the markets hoped for a smaller hike in December, Fed chair Powell noted the ultimate level of interest rates will be higher than previously expected.

Assuming still another 50 points hike in the first quarter of 2023, the Fed seems to be aiming at a rate of 5%. But will that prove “terminal”?

Trade wars, deglobalization and unwarranted conflicts tend to foster inflation. Will their impact really diminish by March 31, 2023? And what about energy and food inflation, and the new pandemic variants?

If assumptions are flawed, corrections ensue in the markets.

Toward an inclusive global monetary system

If the Fed’s monetary pain isn’t enough, the White House’s foreign policy fosters runaway inflation and elevated uncertainty. The net effect has been the lethal mix of a global energy crisis and what the UN Secretary-General Antonio Guterres has called the “meltdown of the global food system.”

As aggressive rate hikes continue to push the US, the UK, and Europe toward a stagflationary recession, peace talks are avoided in Ukraine whereas war rhetoric is gaining in Taiwan and several other international “hot spots.”

Indeed, a rapid, proactive diplomacy has not been the objective in Ukraine. Instead, as US defense secretary Lloyd Austin acknowledged in late April: “We want to see Russia weakened.” Today it seems that the effective strategic objective is to undermine China’s economy, even at the expense of Chinese, Asian and global economic prospects.

Aggressive rate hikes are predicated on greater unemployment and income polarization in America and worldwide. It is the 1980s déjà vu all over again, but with lost years in many advanced and emerging economies, and lost decades in developing countries. The difference is that today’s international environment is far more dire.

That’s what happens when the monetary policy of a single major country dominates the global economic prospects. Effectively, 332 million people dictate the future of 8 billion people. It is a system mired in conflicts of interests; and a system that fosters unwarranted suffering worldwide.

What we need is a monetary system that prioritizes peace and stability, full employment and steady prices – an inclusive system that looks like the world population it is supposed to serve.

About the Author:

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net

Economics & Fundamentals Opinions

08 Nov

How might 2022 US midterm elections affect stocks? Here are 3 scenarios.

By ForexTime

Since 1946, US stocks typically fared better in 6-month period after midterms elections, than six months prior.
Democrats retaining control of Congress may be deemed negative for US stocks, while Republicans wresting control of Congress could be seen as positive for equities.
However, any reaction to this midterm election could be relatively modest compared to the larger driver that is the Fed’s attempts to cool still-hot inflation (and possible trigger a US recession).

History has been kind for US stock markets following the midterm elections.

According to Bloomberg data, for 16 out of the past 19 midterms since 1946, stocks have fared better in the 6-month period after a midterms than the six months before the elections.

Also, take into account the year-end seasonality which typically heralds stock gains.

Over the past three decades, the month of November has seen an average monthly gain of 1.84% for the S&P 500.

That’s the second-highest monthly average gain going back to 1993, after first-placed April’s 2.28% average monthly climb over that three-decade span.

However, this year could be different.

The US pollical landscape has since changed drastically, with the chasm seemingly growing more polarized with the passage of time.

Also, the macroeconomic backdrop and the resultant central bank response has been unkind to risk assets, to say the least.

After all:

US core inflation (consumer prices that exclude more-volatile food and energy prices) is at its highest since 1982, pending this Thursday’s (Nov. 10th) US inflation data release.
At 6.6% as of September 2022, that core CPI print is still more than triple the Fed’s 2% target (though the Fed’s preferred inflation gauge is the Core PCE).
The US Federal Reserve has already hiked its benchmark interest rates by 375 basis points so far this year, bringing the upper bound of its rates range now to 4% = a level not seen since 2008.
Using current market forecasts, US rates are expected to peak at 5.1% by mid-2023, though that peak could move even higher if US inflation is shown to be stubbornly elevated.

A reminder of what’s at stake in today’s midterm elections: control of the US Congress.

NOTE: Senate + House = US Congress

Up for grabs today:

435 seats in House of Representatives
35 of the 100 Senate seats
36 governorships

Going into this election, Democrats have control of both chambers of Congress, as well as the White House (US President Joe Biden is a Democrat).

Republicans only need to take on 5 seats to claim a House-majority, while only one more seat is needed to take control of the Senate.

Ultimately, markets want to know how the political makeup of Congress would set the incoming fiscal policies, and how such policies would feed into the current inflation outlook as well as the Fed’s expected response.

After all, inflation woes as well as recession fears are very much framing voters’ mindsets as they cast their ballots today.

Such worries have already seen a notable shift away from Democrats, with President Biden’s approval ratings falling in the lead up to today’s elections.

3 scenarios for US stocks

But as for investors and traders around the world, here are some broad outcomes that they might have to content with over the next 24 hours:

If Republicans control both the House and the Senate = S&P 500 may extend recent gains
Republicans are typically associated with tighter fiscal spending.
Less government spending could work in tandem with the Fed rate hikes in subduing red-hot consumer prices.
Hence, we may see immediate gains for US stocks based on the above assumptions, as a Republican stronghold on Congress (and tighter fiscal spending) implies that the Fed may have less work to do in subduing inflationary pressures.
Though whether or not Republicans can actually rein in government spending, especially if the US economy threatens to enter a recession in 2023, would be a different matter.
If Democrats retain control of the House and Senate = S&P 500 may fall further
Democrats are typically associated with looser fiscal spending plans/larger government spending.
Already in the lead up to today’s elections, the party has touted boosting healthcare and childcare subsidies and wage hikes for workers.
These types of measures tend to fan inflationary pressures, which implies the Fed has to raise US interest rates even higher.
As we know, Fed rate hikes have essentially been enemy #1 for US stocks this year.
Hence the simplistic assumption here would be:
More government spending by Democrats = more Fed rate hikes = more pain for US stocks.
Political uncertainty / unclear or contested outcome = S&P 500 could revel amidst the ambiguity and hang on to recent gains
Markets generally dislike uncertainty.
However, uncertainty that preserves the way things are (the status quo) may not be such a bad thing for stocks.
Additionally, US stocks have proven resilient to political unrest, judging by recent history.
Recall how even amidst the January 2021 riots at the US Capitol, the S&P 500 barely budged, going about its merry way towards its all-time high just a hair below 4820 (intraday prices) at the start of 2022.
Still, one could argue how any chaos in Congress might yet trigger a knee-jerk selloff across stocks, with investors potentially entering into risk-off mode and seeking refuge in safe havens (e.g. gold, US dollar, US Treasuries).

Looking at the charts …

To be clear, the S&P 500 remains very much in a downtrend on the weekly timeframe.

And with the S&P 500 already headed for its worst year since the Global Financial Crisis, today’s midterm elections may influence whether its:

year-to-date losses of 20% can be trimmed, or …
the ongoing bear market will be extended in 2023

Heightened macro fears (and downward earnings revisions) may yet see the S&P 500 ultimately retesting its 200-week SMA for support in the mid-3000 region.

Key Resistance and Support levels for S&P 500 after 2022 US midterm elections:

IMMEDIATE RESISTANCE: 3920
(late-October/early-November cycle high, also around its 100-day simple moving average)
STRONGER RESISTANCE: 4000 psychologically-important mark
IMMEDIATE SUPPORT: 3700 region
(last week’s low)
STRONGER SUPPORT: around 3637
(mid-June cycle low)

Overall, I’m inclined to think that any reaction to the US midterm elections are expected to be relatively muted compared to the bigger driver that is the Fed’s ongoing rate hikes which in turn are ramping up recession risks for the world’s largest economy.

Noting that the final tally for this US midterm elections could take days before reaching a conclusive ending, then should leave Thursday’s US inflation report in the driver’s seat for dictating how the S&P 500 would fare over the immediate term.

Article by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Opinions Stock Market News

07 Nov

Why Meta’s share price collapse is good news for the future of social media

By Renaud Foucart, Lancaster University

Facebook may not be the original social media platform but it has stood the test of time – until recently. Meta, the company that owns Facebook, Instagram and WhatsApp, saw its value plummet by around $80 billion (£69 billion) in just one day at the end of October, after its third-quarter profits halved amid the global slowdown. Meta is now valued at around $270 billion compared with more than $1 trillion last year.

Several issues have caused investors to turn away from the social media giant, including falling advertising revenue, a conflict with Apple over its app store charging policy, and competition for younger audiences from newer platforms such as TikTok.

Meta’s chief-executive Mark Zuckerberg has also used his majority control to double down on his ambitions for the “metaverse”, a virtual reality project on which he has already spent more than $100 billion – with questionable results according to initial investor and media reaction. Zuckerberg has promised even more investment in the metaverse next year.

It’s tempting to describe this spending spree as a billionaire’s “insane fantasy”, but there is a simpler explanation. As dominant platforms compete for a limited amount of advertising revenue, regulation – particularly when it differs between countries or regions – has created space for more competitors. This is good news for new social media companies, but it also means that the only way Meta is likely to be able to keep its dominant position is by placing a massive bet on the technology of the future. Zuckerberg believes that means the metaverse, but this remains to be seen.

Tech’s changing fortunes

Even with its recent troubles, Meta owns the largest social network in the world. Those recent results that caused investors to flee in their droves still showed total revenues of $27 billion and profits of $4.4 billion.

To maintain its position as market leader in the past, Meta has typically bought its most promising competitors as early as possible. Integrating these newly acquired startups into the company’s ecosystem helped to maximise advertising revenue and preclude competition.

Research shows that digital markets are typically dominated by a single firm, but also that these firms tend to be much more specialised than the major companies of the past. Meta is only active in social media and makes money almost exclusively by selling advertising.

Attempts by such firms to expand into other areas typically fail – know anyone with a Facebook phone? And while you may not remember Google’s attempt at social media, iPhone users are probably at least aware of Apple’s maps app.

So Facebook relies on consumers using devices produced by other tech companies to make money. But as global social media advertising revenue slows down, this is becoming more difficult. Apple has begun charging Meta for the revenue it makes from iPhone users, for example. And research shows that, when two companies compete to make money from the same captive source, their successive markups not only push prices higher for consumers but also keep profits lower for both firms.

Global domination fail

Meta’s strategy has, until recently, allowed it to rule social media in western markets – but not in China, a country of more than 300 million social media users. Since 2009, Facebook has been blocked by the country’s “great firewall”, the largest and most sophisticated system of censorship in the world.

Reported attempts to adapt Facebook to suit Chinese government media control have never been successful. And so, Chinese company ByteDance was able to launch a news platform called Toutiao in 2012 without having to compete with a dominant social network. In 2016, ByteDance launched Douyin, a social media platform for publishing short videos which was subsequently released to the rest of the world in 2018 as TikTok.

Despite not being profitable, ByteDance’s market capitalisation is now estimated at around $300 billion – versus Meta’s current £270 billion valuation. It is also popular among younger users that tend to be much more avid social media users.

Meta cannot simply buy TikTok: it is too big, not publicly traded and under tight control by the Chinese government. Zuckerberg’s firm has instead tried to compete by launching similar features on Instagram. Ironically, the only large market where this strategy is really working is India, a country that banned TikTok in 2021 due to a military conflict with China.

Fair competition

At the same time that TikTok has been expanding beyond Meta’s reach, western regulators have also started to examine the impact of the lack of competition in digital markets on innovation. While research shows that the winner-take-all nature of highly innovative markets is typically good for consumers, this is only true when all companies get a fair chance to become dominant.

In addition to recent rulings against tech company dominance by its highest court, the European Union also recently introduced the Digital Markets Act. This outlaws many practices used by dominant firms to preserve their status in a market.

Similar legislation is expected from the US after the November midterm elections, while the UK has forced Meta to sell gif library Giphy to ensure it doesn’t decrease competition in the online advertising sector.

All of this means that, for Facebook to remain dominant, Meta needs to invest in its own products. To be the market leader of tomorrow, the company cannot simply count on buying up promising startups.

But its metaverse is a nebulous project and an odd bet. After all, Google has already failed to drum up interest in Google Glass, even though the technology behind it was successful. What has changed to convince normal people to regularly wear virtual reality headsets?

The only alternative for Meta may be to find a better idea in which to invest. In the meantime, regulation continues to protect potential competitors. This is great news for consumers and creators alike: now might be the best moment to launch an innovative social media format that can actually compete with giants like Meta to become the market leader.

About the Author:

Renaud Foucart, Senior Lecturer in Economics, Lancaster University Management School, Lancaster University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Opinions Stock Market News

07 Nov

Trade Of The Week: Will USD continue to reign supreme?

By ForexTime

After dominating the FX space this year, could the dollar’s reign be coming to an end?

The past few weeks have been rough for the greenback thanks to renewed risk sentiment and markets scaling back bets for further aggressive Federal Reserve interest rate increases. Since the start of Q4, the dollar has depreciated against almost every single G10 currency – shedding more than 6% against the Norwegian Krone and over 5.7% versus the New Zealand Dollar.

Since hitting a fresh 20-year high above 114.50 back in late September, the Dollar Index (DXY) seems to be respecting a bearish channel, creating fresh lower lows and lower highs. With prices trading below the MACD and approaching the 110.00 support, a breakdown could be on the horizon.

There was a similar move on the equally-weighted dollar index which is wobbling above 1.2400 as of writing.

With the path of least resistance on the technical charts pointing south and the fundamentals slowly swinging in favour of bears as investors trim Fed hike bets, the dollar could end Q4 on a negative note. However, there are a couple of key US economic reports and one more Fed meeting in December which could heavily influence the dollar’s medium to longer-term outlook.

In the meantime, the dollar may be waiting for a fresh fundamental spark…and this could be the US inflation report on Thursday.

The low down…

Last week, king dollar surrendered its gains thanks to the improving market mood and growing expectations around the Federal Reserve delivering smaller rate hikes.

The Fed hiked interest rates by 75bps for the 4th straight time and Jerome Powell sent a clear message to markets about the potential for rates to peak higher than expected. Given how this move poured cold water around a dovish pivot, dollar bulls were injected with renewed confidence.

However, the jobs report for October sent mixed signals about the US labour market. Although the Nonfarm payrolls surged by 261k in October, above market forecasts of 200k – the unemployment rate rose to 3.7%, still close to a 50-year high. The mixed jobs report combined with soft economic data prompted market players to price in smaller rate hikes in the future. According to Bloomberg, traders have priced in a 50bps rate hike in December with the probability of a 75bps move only at 25%.

These reduced Fed hike bets may keep the dollar subdued ahead of the next major risk event. On a technical front, the damage is already being done on the equally weighted USD index which is struggling to keep above 1.2400. A breakdown below this point could trigger a selloff towards 1.2340 in the near term.

Will CPI data revive USD bulls?

The greenback is set to remain choppy and shaky ahead of the latest US inflation reading on Thursday.

Markets expect the headline CPI to have increased 8% year-on-year in October, down from 8.2% in September. In regards to Core CPI, which strips out the volatility from food and energy prices, it is expected to remain at a 40-year high of 6.6%. If the US inflation data exceeds market expectations, this may rekindle expectations around the Fed delivering jumbo hikes – resulting in a strong US dollar. Although a scenario where prices begin to slow may weaken the dollar and reduce rate hike expectations, inflation is still well above the Federal Reserve’s safe zone.

Time for dollar to sell off?

The equally weighted dollar index could be preparing to tumble lower if 1.2400 proves to be unreliable support. Prices remain in a bullish channel on the weekly charts but the heavily bearish candle printed last week signals a potential breakdown. Such a development could open the doors back towards 1.2184 and 1.1900, respectively. Should 1.2400 prove to be solid support, prices may rebound back towards 1.2500, 1.2750, and 1.2800, respectively.

Article by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Forex and Currency News Opinions

07 Nov

A brief history of the mortgage, from its roots in ancient Rome to the English ‘dead pledge’ and its rebirth in America

By Michael J. Highfield, Mississippi State University

The average interest rate for a new U.S. 30-year fixed-rate mortgage topped 7% in late October 2022 for the first time in more than two decades. It’s a sharp increase from one year earlier, when lenders were charging homebuyers only 3.09% for the same kind of loan.

Several factors, including inflation rates and the general economic outlook, influence mortgage rates. A primary driver of the ongoing upward spiral is the Federal Reserve’s series of interest rate hikes intended to tame inflation. Its decision to increase the benchmark rate by 0.75 percentage points on Nov. 2, 2022, to as much as 4% will propel the cost of mortgage borrowing even higher.

Even if you have had mortgage debt for years, you might be unfamiliar with the history of these loans – a subject I cover in my mortgage financing course for undergraduate business students at Mississippi State University.

The term dates back to medieval England. But the roots of these legal contracts, in which land is pledged for a debt and will become the property of the lender if the loan is not repaid, go back thousands of years.

Ancient roots

Historians trace the origins of mortgage contracts to the reign of King Artaxerxes of Persia, who ruled modern-day Iran in the fifth century B.C. The Roman Empire formalized and documented the legal process of pledging collateral for a loan.

Often using the forum and temples as their base of operations, mensarii, which is derived from the word mensa or “bank” in Latin, would set up loans and charge borrowers interest. These government-appointed public bankers required the borrower to put up collateral, whether real estate or personal property, and their agreement regarding the use of the collateral would be handled in one of three ways.

First, the Fiducia, Latin for “trust” or “confidence,” required the transfer of both ownership and possession to lenders until the debt was repaid in full. Ironically, this arrangement involved no trust at all.

Second, the Pignus, Latin for “pawn,” allowed borrowers to retain ownership while sacrificing possession and use until they repaid their debts.

Finally, the Hypotheca, Latin for “pledge,” let borrowers retain both ownership and possession while repaying debts.

The living-versus-dead pledge

Emperor Claudius brought Roman law and customs to Britain in A.D. 43. Over the next four centuries of Roman rule and the subsequent 600 years known as the Dark Ages, the British adopted another Latin term for a pledge of security or collateral for loans: Vadium.

If given as collateral for a loan, real estate could be offered as “Vivum Vadium.” The literal translation of this term is “living pledge.” Land would be temporarily pledged to the lender who used it to generate income to pay off the debt. Once the lender had collected enough income to cover the debt and some interest, the land would revert back to the borrower.

With the alternative, the “Mortuum Vadium” or “dead pledge,” land was pledged to the lender until the borrower could fully repay the debt. It was, essentially, an interest-only loan with full principal payment from the borrower required at a future date. When the lender demanded repayment, the borrower had to pay off the loan or lose the land.

Lenders would keep proceeds from the land, be it income from farming, selling timber or renting the property for housing. In effect, the land was dead to the debtor during the term of the loan because it provided no benefit to the borrower.

Following William the Conqueror’s victory at the Battle of Hastings in 1066, the English language was heavily influenced by Norman French – William’s language.

That is how the Latin term “Mortuum Vadium” morphed into “Mort Gage,” Norman French for “dead” and “pledge.” “Mortgage,” a mashup of the two words, then entered the English vocabulary.

Establishing rights of borrowers

Unlike today’s mortgages, which are usually due within 15 or 30 years, English loans in the 11th-16th centuries were unpredictable. Lenders could demand repayment at any time. If borrowers couldn’t comply, lenders could seek a court order, and the land would be forfeited by the borrower to the lender.

Unhappy borrowers could petition the king regarding their predicament. He could refer the case to the lord chancellor, who could rule as he saw fit.

Sir Francis Bacon, England’s lord chancellor from 1618 to 1621, established the Equitable Right of Redemption.

This new right allowed borrowers to pay off debts, even after default.

The official end of the period to redeem the property was called foreclosure, which is derived from an Old French word that means “to shut out.” Today, foreclosure is a legal process in which lenders to take possession of property used as collateral for a loan.

Early US housing history

The English colonization of what’s now the United States didn’t immediately transplant mortgages across the pond.

But eventually, U.S. financial institutions were offering mortgages.

Before 1930, they were small – generally amounting to at most half of a home’s market value.

These loans were generally short-term, maturing in under 10 years, with payments due only twice a year. Borrowers either paid nothing toward the principal at all or made a few such payments before maturity.

Borrowers would have to refinance loans if they couldn’t pay them off.

Rescuing the housing market

Once America fell into the Great Depression, the banking system collapsed.

With most homeowners unable to pay off or refinance their mortgages, the housing market crumbled. The number of foreclosures grew to over 1,000 per day by 1933, and housing prices fell precipitously.

The federal government responded by establishing new agencies to stabilize the housing market.

They included the Federal Housing Administration. It provides mortgage insurance – borrowers pay a small fee to protect lenders in the case of default.

Another new agency, the Home Owners’ Loan Corp., established in 1933, bought defaulted short-term, semiannual, interest-only mortgages and transformed them into new long-term loans lasting 15 years.

Payments were monthly and self-amortizing – covering both principal and interest. They were also fixed-rate, remaining steady for the life of the mortgage. Initially they skewed more heavily toward interest and later defrayed more principal. The corporation made new loans for three years, tending to them until it closed in 1951. It pioneered long-term mortgages in the U.S.

In 1938 Congress established the Federal National Mortgage Association, better known as Fannie Mae. This government-sponsored enterprise made fixed-rate long-term mortgage loans viable through a process called securitization – selling debt to investors and using the proceeds to purchase these long-term mortgage loans from banks. This process reduced risks for banks and encouraged long-term mortgage lending.

Fixed- versus adjustable-rate mortgages

After World War II, Congress authorized the Federal Housing Administration to insure 30-year loans on new construction and, a few years later, purchases of existing homes. But then, the credit crunch of 1966 and the years of high inflation that followed made adjustable-rate mortgages more popular.

Known as ARMs, these mortgages have stable rates for only a few years. Typically, the initial rate is significantly lower than it would be for 15- or 30-year fixed-rate mortgages. Once that initial period ends, interest rates on ARMs get adjusted up or down annually – along with monthly payments to lenders.

Unlike the rest of the world, where ARMs prevail, Americans still prefer the 30-year fixed-rate mortgage.

About 61% of American homeowners have mortgages today – with fixed rates the dominant type.

But as interest rates rise, demand for ARMs is growing again. If the Federal Reserve fails to slow inflation and interest rates continue to climb, unfortunately for some ARM borrowers, the term “dead pledge” may live up to its name.

About the Author:

Michael J. Highfield, Professor of Finance and Warren Chair of Real Estate Finance, Mississippi State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Opinions Real Estate

06 Nov

Mexican Peso & Euro Currency Speculators sharply boost their bullish bets

By InvestMacro

Here are the latest charts and statistics for the Commitment of Traders (COT) data published by the Commodities Futures Trading Commission (CFTC).

The latest COT data is updated through Tuesday November 1st and shows a quick view of how large market participants (for-profit speculators and commercial traders) were positioned in the futures markets. All currency positions are in direct relation to the US dollar where, for example, a bet for the euro is a bet that the euro will rise versus the dollar while a bet against the euro will be a bet that the euro will decline versus the dollar.

Weekly Speculator Changes led by Peso & Euro bets

The COT currency market speculator bets were overall higher this week as seven out of the eleven currency markets we cover had higher positioning while the other four markets had lower speculator contracts.

Leading the gains for the currency markets were the Mexican peso (31,471 contracts), the Euro (30,881 contracts) and the Japanese yen (24,998 contracts) with the New Zealand dollar (9,037 contracts), the British pound sterling (2,969 contracts), the Australian dollar (914 contracts) and the Canadian dollar (506 contracts) also showing positive weeks.

The currencies leading the declines in speculator bets this week was the Swiss franc (-3,484 contracts) with Bitcoin (-475 contracts), the US Dollar Index (-310 contracts) and the Brazilian real (-22 contracts) also registering lower bets on the week.

Highlighting the COT currency data this week is the strong gains in the Mexican peso positioning since the start of October. Peso speculative positions jumped by over +30,000 contracts for a second straight week this week and have now been higher by at least +10,000 contracts in each of the past three weeks. Overall, the peso position has gained for five consecutive weeks and by a total of +85,367 contracts over that five-week period.

The renewed speculator optimism has brought the peso positioning from out of the bearish level it was in for nineteen straight weeks (from June 14th to October 18th) into a new bullish standing and to most bullish level since March 8th. The peso’s futures price has also been on the rise with a gain by over 1.50 percent this week. Peso prices have now risen in five out of the past six weeks and have reached their best level since early June.

Another highlight of this week’s COT data is the Euro’s continued gains in speculator positions. The large speculator contracts rose strongly yet again this week as the Euro position has now climbed for a third straight week and for the eighth time in the past nine weeks. The nine-week speculator’s total increase now stands at a whopping +153,466 contracts. The Euro position was in bearish territory as recently as September 13th (total of -11,837 contracts) and now the total speculator position is at +105,790 contracts (a 72-week high). However, despite this strong speculator sentiment, the Euro exchange rate versus the US dollar continues to only trade around parity or the 1.000 level. The speculators are usually reliable trend-followers (buying when prices rises and selling when prices fall) and this divergence between the price and speculator contracts is growing quite large and could foretell a possible strong future movement in the Euro one way or the other.

Data Snapshot of Forex Market Traders | Columns Legend

Nov-01-2022	OI	OI-Index	Spec-Net	Spec-Index	Com-Net	COM-Index	Smalls-Net	Smalls-Index
USD Index	55,942	80	29,788	75	-33,331	23	3,543	55
EUR	671,729	65	105,790	67	-128,819	39	23,029	16
GBP	243,549	63	-44,836	31	65,377	78	-20,541	18
JPY	258,906	86	-77,620	21	95,774	82	-18,154	17
CHF	50,107	41	-14,784	19	27,731	88	-12,947	14
CAD	147,170	28	-17,649	21	19,275	85	-1,626	27
AUD	165,411	56	-50,532	38	62,726	66	-12,194	23
NZD	47,219	38	-3,847	61	6,881	45	-3,034	17
MXN	282,864	88	44,045	46	-50,512	52	6,467	70
RUB	20,930	4	7,543	31	-7,150	69	-393	24
BRL	58,289	51	29,157	79	-29,139	23	-18	65
Bitcoin	12,183	67	-452	69	-16	0	468	24

Brazilian Real & US Dollar Index lead Strength Scores

Strength Scores (a normalized measure of Speculator positions over a 3-Year range, from 0 to 100 where above 80 is extreme bullish and below 20 is extreme bearish) showed that the Brazilian Real (79.0 percent) and the US Dollar Index (74.6 percent) lead the currency markets currently. Bitcoin (69.1 percent) and the EuroFX (67.5 percent) come in as the next highest in the currency markets in strength scores.

On the downside, the Swiss Franc (19.0 percent) comes in at the lowest strength level currently and is in a bearish extreme position under 20 percent. The Canadian Dollar (20.8 percent), the Japanese Yen (21.1 percent) and the British Pound Sterling (30.5 percent) come in as the next lowest scores.

Strength Statistics:
US Dollar Index (74.6 percent) vs US Dollar Index previous week (75.1 percent)
EuroFX (67.5 percent) vs EuroFX previous week (58.0 percent)
British Pound Sterling (30.5 percent) vs British Pound Sterling previous week (28.0 percent)
Japanese Yen (21.1 percent) vs Japanese Yen previous week (5.7 percent)
Swiss Franc (19.0 percent) vs Swiss Franc previous week (27.8 percent)
Canadian Dollar (20.8 percent) vs Canadian Dollar previous week (20.2 percent)
Australian Dollar (38.0 percent) vs Australian Dollar previous week (37.1 percent)
New Zealand Dollar (60.7 percent) vs New Zealand Dollar previous week (43.8 percent)
Mexican Peso (46.1 percent) vs Mexican Peso previous week (32.7 percent)
Brazilian Real (79.0 percent) vs Brazilian Real previous week (79.1 percent)
Bitcoin (69.1 percent) vs Bitcoin previous week (77.3 percent)

Peso & Euro top the Strength Trends

Strength Score Trends (or move index, calculates the 6-week changes in strength scores) showed that the Mexican Peso (30.7 percent) and the EuroFX (22.2 percent) lead the past six weeks trends for the currency markets this week. The New Zealand Dollar (16.4 percent) and the British Pound Sterling (8.6 percent) fill out the next top movers in the latest trends data.

The Canadian Dollar (-23.5 percent) leads the downside trend scores currently while the next markets with lower trend scores were the Swiss Franc (-20.4 percent) followed by Bitcoin (-17.9 percent).

Strength Trend Statistics:
US Dollar Index (3.1 percent) vs US Dollar Index previous week (-9.3 percent)
EuroFX (22.2 percent) vs EuroFX previous week (26.6 percent)
British Pound Sterling (8.6 percent) vs British Pound Sterling previous week (17.4 percent)
Japanese Yen (2.3 percent) vs Japanese Yen previous week (-13.5 percent)
Swiss Franc (-20.4 percent) vs Swiss Franc previous week (-10.1 percent)
Canadian Dollar (-23.5 percent) vs Canadian Dollar previous week (-36.5 percent)
Australian Dollar (-9.3 percent) vs Australian Dollar previous week (5.9 percent)
New Zealand Dollar (16.4 percent) vs New Zealand Dollar previous week (-14.2 percent)
Mexican Peso (30.7 percent) vs Mexican Peso previous week (16.2 percent)
Brazilian Real (-3.2 percent) vs Brazilian Real previous week (-3.7 percent)
Bitcoin (-17.9 percent) vs Bitcoin previous week (-1.8 percent)

Individual COT Forex Markets:

US Dollar Index Futures:

The US Dollar Index large speculator standing this week came in at a net position of 29,788 contracts in the data reported through Tuesday. This was a weekly reduction of -310 contracts from the previous week which had a total of 30,098 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bullish with a score of 74.6 percent. The commercials are Bearish with a score of 22.9 percent and the small traders (not shown in chart) are Bullish with a score of 55.3 percent.

US DOLLAR INDEX Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	75.6	10.3	11.5
– Percent of Open Interest Shorts:	22.4	69.9	5.2
– Net Position:	29,788	-33,331	3,543
– Gross Longs:	42,304	5,761	6,460
– Gross Shorts:	12,516	39,092	2,917
– Long to Short Ratio:	3.4 to 1	0.1 to 1	2.2 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	74.6	22.9	55.3
– Strength Index Reading (3 Year Range):	Bullish	Bearish	Bullish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	3.1	-4.1	7.6

Euro Currency Futures:

The Euro Currency large speculator standing this week came in at a net position of 105,790 contracts in the data reported through Tuesday. This was a weekly advance of 30,881 contracts from the previous week which had a total of 74,909 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bullish with a score of 67.5 percent. The commercials are Bearish with a score of 39.5 percent and the small traders (not shown in chart) are Bearish-Extreme with a score of 15.7 percent.

EURO Currency Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	35.7	50.5	11.5
– Percent of Open Interest Shorts:	19.9	69.7	8.0
– Net Position:	105,790	-128,819	23,029
– Gross Longs:	239,770	339,364	77,062
– Gross Shorts:	133,980	468,183	54,033
– Long to Short Ratio:	1.8 to 1	0.7 to 1	1.4 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	67.5	39.5	15.7
– Strength Index Reading (3 Year Range):	Bullish	Bearish	Bearish-Extreme
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	22.2	-21.7	6.6

British Pound Sterling Futures:

The British Pound Sterling large speculator standing this week came in at a net position of -44,836 contracts in the data reported through Tuesday. This was a weekly rise of 2,969 contracts from the previous week which had a total of -47,805 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish with a score of 30.5 percent. The commercials are Bullish with a score of 78.5 percent and the small traders (not shown in chart) are Bearish-Extreme with a score of 17.7 percent.

BRITISH POUND Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	14.4	75.2	8.0
– Percent of Open Interest Shorts:	32.8	48.4	16.4
– Net Position:	-44,836	65,377	-20,541
– Gross Longs:	34,979	183,210	19,464
– Gross Shorts:	79,815	117,833	40,005
– Long to Short Ratio:	0.4 to 1	1.6 to 1	0.5 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	30.5	78.5	17.7
– Strength Index Reading (3 Year Range):	Bearish	Bullish	Bearish-Extreme
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	8.6	-5.5	-3.7

Japanese Yen Futures:

The Japanese Yen large speculator standing this week came in at a net position of -77,620 contracts in the data reported through Tuesday. This was a weekly advance of 24,998 contracts from the previous week which had a total of -102,618 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish with a score of 21.1 percent. The commercials are Bullish-Extreme with a score of 82.4 percent and the small traders (not shown in chart) are Bearish-Extreme with a score of 16.6 percent.

JAPANESE YEN Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	15.6	73.9	8.9
– Percent of Open Interest Shorts:	45.6	36.9	15.9
– Net Position:	-77,620	95,774	-18,154
– Gross Longs:	40,460	191,221	23,021
– Gross Shorts:	118,080	95,447	41,175
– Long to Short Ratio:	0.3 to 1	2.0 to 1	0.6 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	21.1	82.4	16.6
– Strength Index Reading (3 Year Range):	Bearish	Bullish-Extreme	Bearish-Extreme
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	2.3	-0.8	-3.9

Swiss Franc Futures:

The Swiss Franc large speculator standing this week came in at a net position of -14,784 contracts in the data reported through Tuesday. This was a weekly decrease of -3,484 contracts from the previous week which had a total of -11,300 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish-Extreme with a score of 19.0 percent. The commercials are Bullish-Extreme with a score of 87.7 percent and the small traders (not shown in chart) are Bearish-Extreme with a score of 13.7 percent.

SWISS FRANC Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	13.2	71.5	15.1
– Percent of Open Interest Shorts:	42.7	16.1	40.9
– Net Position:	-14,784	27,731	-12,947
– Gross Longs:	6,612	35,822	7,559
– Gross Shorts:	21,396	8,091	20,506
– Long to Short Ratio:	0.3 to 1	4.4 to 1	0.4 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	19.0	87.7	13.7
– Strength Index Reading (3 Year Range):	Bearish-Extreme	Bullish-Extreme	Bearish-Extreme
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-20.4	23.5	-22.7

Canadian Dollar Futures:

The Canadian Dollar large speculator standing this week came in at a net position of -17,649 contracts in the data reported through Tuesday. This was a weekly boost of 506 contracts from the previous week which had a total of -18,155 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish with a score of 20.8 percent. The commercials are Bullish-Extreme with a score of 84.8 percent and the small traders (not shown in chart) are Bearish with a score of 26.8 percent.

CANADIAN DOLLAR Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	26.2	50.5	21.2
– Percent of Open Interest Shorts:	38.2	37.4	22.3
– Net Position:	-17,649	19,275	-1,626
– Gross Longs:	38,522	74,352	31,212
– Gross Shorts:	56,171	55,077	32,838
– Long to Short Ratio:	0.7 to 1	1.3 to 1	1.0 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	20.8	84.8	26.8
– Strength Index Reading (3 Year Range):	Bearish	Bullish-Extreme	Bearish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-23.5	15.3	2.7

Australian Dollar Futures:

The Australian Dollar large speculator standing this week came in at a net position of -50,532 contracts in the data reported through Tuesday. This was a weekly lift of 914 contracts from the previous week which had a total of -51,446 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish with a score of 38.0 percent. The commercials are Bullish with a score of 65.7 percent and the small traders (not shown in chart) are Bearish with a score of 22.7 percent.

AUSTRALIAN DOLLAR Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	20.6	67.5	9.3
– Percent of Open Interest Shorts:	51.2	29.6	16.6
– Net Position:	-50,532	62,726	-12,194
– Gross Longs:	34,148	111,638	15,301
– Gross Shorts:	84,680	48,912	27,495
– Long to Short Ratio:	0.4 to 1	2.3 to 1	0.6 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	38.0	65.7	22.7
– Strength Index Reading (3 Year Range):	Bearish	Bullish	Bearish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-9.3	7.9	-1.5

New Zealand Dollar Futures:

The New Zealand Dollar large speculator standing this week came in at a net position of -3,847 contracts in the data reported through Tuesday. This was a weekly increase of 9,037 contracts from the previous week which had a total of -12,884 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bullish with a score of 60.7 percent. The commercials are Bearish with a score of 45.4 percent and the small traders (not shown in chart) are Bearish-Extreme with a score of 16.8 percent.

NEW ZEALAND DOLLAR Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	44.7	48.9	5.7
– Percent of Open Interest Shorts:	52.9	34.4	12.2
– Net Position:	-3,847	6,881	-3,034
– Gross Longs:	21,115	23,103	2,707
– Gross Shorts:	24,962	16,222	5,741
– Long to Short Ratio:	0.8 to 1	1.4 to 1	0.5 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	60.7	45.4	16.8
– Strength Index Reading (3 Year Range):	Bullish	Bearish	Bearish-Extreme
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	16.4	-16.9	13.4

Mexican Peso Futures:

The Mexican Peso large speculator standing this week came in at a net position of 44,045 contracts in the data reported through Tuesday. This was a weekly boost of 31,471 contracts from the previous week which had a total of 12,574 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish with a score of 46.1 percent. The commercials are Bullish with a score of 51.7 percent and the small traders (not shown in chart) are Bullish with a score of 70.4 percent.

MEXICAN PESO Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	64.5	32.1	3.0
– Percent of Open Interest Shorts:	48.9	50.0	0.7
– Net Position:	44,045	-50,512	6,467
– Gross Longs:	182,316	90,811	8,464
– Gross Shorts:	138,271	141,323	1,997
– Long to Short Ratio:	1.3 to 1	0.6 to 1	4.2 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	46.1	51.7	70.4
– Strength Index Reading (3 Year Range):	Bearish	Bullish	Bullish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	30.7	-31.0	9.2

Brazilian Real Futures:

The Brazilian Real large speculator standing this week came in at a net position of 29,157 contracts in the data reported through Tuesday. This was a weekly fall of -22 contracts from the previous week which had a total of 29,179 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bullish with a score of 79.0 percent. The commercials are Bearish with a score of 22.9 percent and the small traders (not shown in chart) are Bullish with a score of 64.6 percent.

BRAZIL REAL Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	65.7	22.9	10.7
– Percent of Open Interest Shorts:	15.7	72.9	10.7
– Net Position:	29,157	-29,139	-18
– Gross Longs:	38,325	13,328	6,246
– Gross Shorts:	9,168	42,467	6,264
– Long to Short Ratio:	4.2 to 1	0.3 to 1	1.0 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	79.0	22.9	64.6
– Strength Index Reading (3 Year Range):	Bullish	Bearish	Bullish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-3.2	4.8	-20.2

Bitcoin Futures:

The Bitcoin large speculator standing this week came in at a net position of -452 contracts in the data reported through Tuesday. This was a weekly lowering of -475 contracts from the previous week which had a total of 23 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bullish with a score of 69.1 percent. The commercials are Bullish with a score of 63.8 percent and the small traders (not shown in chart) are Bearish with a score of 23.6 percent.

BITCOIN Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	73.6	3.3	10.0
– Percent of Open Interest Shorts:	77.3	3.5	6.2
– Net Position:	-452	-16	468
– Gross Longs:	8,967	406	1,218
– Gross Shorts:	9,419	422	750
– Long to Short Ratio:	1.0 to 1	1.0 to 1	1.6 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	69.1	63.8	23.6
– Strength Index Reading (3 Year Range):	Bullish	Bullish	Bearish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-17.9	38.7	5.3

Article By InvestMacro – Receive our weekly COT Newsletter

*COT Report: The COT data, released weekly to the public each Friday, is updated through the most recent Tuesday (data is 3 days old) and shows a quick view of how large speculators or non-commercials (for-profit traders) were positioned in the futures markets.

The CFTC categorizes trader positions according to commercial hedgers (traders who use futures contracts for hedging as part of the business), non-commercials (large traders who speculate to realize trading profits) and nonreportable traders (usually small traders/speculators) as well as their open interest (contracts open in the market at time of reporting). See CFTC criteria here.

COT Updates Forex and Currency News Opinions

06 Nov

Speculator Extremes: Soybean Meal, Wheat lead weekly COT Bullish & Bearish Positions

By InvestMacro

The latest update for the weekly Commitment of Traders (COT) report was released by the Commodity Futures Trading Commission (CFTC) on Friday for data ending on November 1st.

This weekly Extreme Positions report highlights the Top Most Bullish and Top Most Bearish Positions for the speculator category. Extreme positioning in these markets can foreshadow strong moves in the underlying market.

To signify an extreme position, we use the Strength Index (also known as the COT Index) of each instrument, a common method of measuring COT data. The Strength Index is simply a comparison of current trader positions against the range of positions over the previous 3 years. We use over 80 percent as extremely bullish and under 20 percent as extremely bearish.

Compare Strength Index scores across all markets in the COT data table or COT leaders table.

Here Are This Week’s Most Bullish Speculator Positions:

Soybean Meal

The Soybean Meal speculator position comes in as the most bullish extreme standing this week. The Soybean Meal speculator level is currently at a 94.0 percent score of its 3-year range.

The overall net speculator position totaled 119,508 net contracts this week and has been over the +100,000 net contract level in fifteen out of the past seventeen weeks.

Bloomberg Commodity Index

The Bloomberg Commodity Index speculator position comes in as the only other market above 80 percent in the extreme standings this week. The Bloomberg Commodity Index speculator level is now at a 84.3 percent score of its 3-year range.

The speculator position was a total of -6,047 net contracts this week. This market usually has an overall bearish positioning for speculators and this week’s position is near the lowest levels of the past three years.

This Week’s Most Bearish Speculator Positions:

Wheat

The Wheat speculator position comes in as the most bearish extreme standing this week. The Wheat speculator level is at 0.0 percent score or at the absolute bottom of its 3-year range.

The speculator position was -15,766 net contracts this week and the overall position is in bearish territory for the twelfth time out of the past fourteen weeks. Wheat prices continue to be in an uptrend but the speculator sentiment has fallen sharply from earlier in the year.

2-Year Bond

The 2-Year Bond speculator position comes in as the most bearish extreme standing this week as well. The 2-Year Bond speculator level is at the 0.0 percent score of its 3-year range.

The speculator position was a total of -437,785 net contracts this week and hit the most bearish level on record this week as the US Federal Reserve continued to raise its benchmark interest rate.

Gold

The Gold speculator position comes in next for the most bearish extreme standing on the week. The Gold speculator level is at a 4.2 percent score of its 3-year range.

The speculator position was 64,623 net contracts this week and has now been under +100,000 net contracts for eight straight weeks which has not happened since 2018.

5-Year Bond

The 5-Year Bond speculator position comes in as the most bearish extreme standing this week. The 5-Year Bond speculator level is at 4.3 percent score of its 3-year range.

The speculator position was -536,987 net contracts this week and joins all the other bond markets we cover that have negative or bearish net positioning at the moment.

Ultra 10-Year U.S. T-Note

The Ultra 10-Year U.S. T-Note speculator position comes in as the next market in the most bearish extreme standing. The Ultra 10-Year U.S. T-Note speculator level is at a 7.1 percent score of its 3-year range.

The speculator position was -83,431 net contracts this week.

Article By InvestMacro – Receive our weekly COT Newsletter

COT Updates Opinions

06 Nov

Copper Speculators trim their Bearish bets to 21-week low

By InvestMacro

Here are the latest charts and statistics for the Commitment of Traders (COT) data published by the Commodities Futures Trading Commission (CFTC).

The latest COT data is updated through Tuesday November 1st and shows a quick view of how large traders (for-profit speculators and commercial entities) were positioned in the futures markets.

Copper & Platinum lead Weekly Speculator Changes

The COT precious metals speculator bets were slightly higher this week as three out of the five metals markets we cover had higher positioning this week while two markets had lower contracts.

Leading the gains for the precious metals markets was Copper (9,435 contracts) with Platinum (4,606 contracts) and Silver (1,625 contracts) also showing a positive week.

The metals markets leading the declines in speculator bets this week was Gold (-3,409 contracts) with Palladium (-122 contracts) also registering lower bets on the week.

Highlighting the COT metals data this week is the improvement in the Copper speculators positioning over the past few months. The large speculators raised their Copper bets for the second straight week this week and for the fourth time out of the past five weeks. Copper spec positions have been in an overall bearish standing since April (currently in a 28-week streak of bearish contracts) with the lowest level of -31,796 contracts coming in July. However, the bearish bets have been lightening up of late and this week’s total of -7,484 contracts marks the least bearish level of the past twenty-one weeks, dating back to June 7th.

Copper prices were sharply on the rise this week as well with gains for the week climbing by over 7.50 percent. Helping Copper prices go higher this week were the rumors that China will potentially ease their COVID-related restrictions as well as some supply issues out of South America.

Data Snapshot of Commodity Market Traders | Columns Legend

Nov-01-2022	OI	OI-Index	Spec-Net	Spec-Index	Com-Net	COM-Index	Smalls-Net	Smalls-Index
WTI Crude	1,459,052	2	254,809	12	-275,761	90	20,952	35
Gold	467,276	10	64,623	4	-74,782	96	10,159	5
Silver	138,875	12	1,524	16	-10,363	85	8,839	13
Copper	179,801	18	-7,484	30	7,998	73	-514	22
Palladium	8,372	12	-1,867	13	2,221	87	-354	20
Platinum	56,534	16	15,987	31	-19,690	71	3,703	18
Natural Gas	986,116	7	-148,653	34	127,501	71	21,152	30
Brent	134,010	0	-21,908	74	17,423	22	4,485	70
Heating Oil	268,025	23	21,380	74	-41,295	27	19,915	67
Soybeans	584,073	2	86,522	40	-57,886	69	-28,636	23
Corn	1,472,517	29	340,788	74	-286,790	31	-53,998	12
Coffee	217,400	25	2,183	12	-4,162	93	1,979	27
Sugar	737,846	9	69,093	46	-90,576	56	21,483	34
Wheat	333,061	20	-15,766	0	22,493	92	-6,727	75

Strength Scores led by Copper & Platinum

Strength scores (a measure of the 3-Year range of Speculator positions, from 0 to 100 where above 80 is extreme bullish and below 20 is extreme bearish) showed that Platinum (30.6 percent) and Copper (30.4 percent) lead the metals category.

On the downside, Gold (4.2 percent) continues to be at the lowest strength level currently and is followed by Palladium (12.8 percent) and Silver (15.8 percent). All three of these markets remain in a bearish extreme position with scores below 20 percent.

Strength Statistics:
Gold (4.2 percent) vs Gold previous week (5.3 percent)
Silver (15.8 percent) vs Silver previous week (14.0 percent)
Copper (30.4 percent) vs Copper previous week (22.9 percent)
Platinum (30.6 percent) vs Platinum previous week (24.4 percent)
Palladium (12.8 percent) vs Palladium previous week (13.6 percent)

Strength Trends topped by Platinum

Strength Score Trends (or move index, calculates the 6-week changes in strength scores) show that Platinum (18.3 percent) leads the past six weeks trends for metals this week. Copper (10.2 percent) and Silver (3.5 percent) fill out the other positive movers in the latest trends data.

Palladium (-4.6 percent) leads the downside trend scores currently while the next market with lower trend scores was Gold (-0.4 percent).

Move Statistics:
Gold (-0.4 percent) vs Gold previous week (-9.7 percent)
Silver (3.5 percent) vs Silver previous week (5.0 percent)
Copper (10.2 percent) vs Copper previous week (1.6 percent)
Platinum (18.3 percent) vs Platinum previous week (17.8 percent)
Palladium (-4.6 percent) vs Palladium previous week (-2.8 percent)

Individual Markets:

Gold Comex Futures:

The Gold Comex Futures large speculator standing this week equaled a net position of 64,623 contracts in the data reported through Tuesday. This was a weekly reduction of -3,409 contracts from the previous week which had a total of 68,032 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish-Extreme with a score of 4.2 percent. The commercials are Bullish-Extreme with a score of 96.1 percent and the small traders (not shown in chart) are Bearish-Extreme with a score of 5.0 percent.

Gold Futures Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	46.3	26.9	8.3
– Percent of Open Interest Shorts:	32.5	42.9	6.1
– Net Position:	64,623	-74,782	10,159
– Gross Longs:	216,341	125,689	38,559
– Gross Shorts:	151,718	200,471	28,400
– Long to Short Ratio:	1.4 to 1	0.6 to 1	1.4 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	4.2	96.1	5.0
– Strength Index Reading (3 Year Range):	Bearish-Extreme	Bullish-Extreme	Bearish-Extreme
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-0.4	0.2	1.1

Silver Comex Futures:

The Silver Comex Futures large speculator standing this week equaled a net position of 1,524 contracts in the data reported through Tuesday. This was a weekly boost of 1,625 contracts from the previous week which had a total of -101 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish-Extreme with a score of 15.8 percent. The commercials are Bullish-Extreme with a score of 85.4 percent and the small traders (not shown in chart) are Bearish-Extreme with a score of 13.1 percent.

Silver Futures Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	36.9	37.3	15.9
– Percent of Open Interest Shorts:	35.8	44.8	9.5
– Net Position:	1,524	-10,363	8,839
– Gross Longs:	51,286	51,802	22,076
– Gross Shorts:	49,762	62,165	13,237
– Long to Short Ratio:	1.0 to 1	0.8 to 1	1.7 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	15.8	85.4	13.1
– Strength Index Reading (3 Year Range):	Bearish-Extreme	Bullish-Extreme	Bearish-Extreme
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	3.5	-4.5	7.5

Copper Grade #1 Futures:

The Copper Grade #1 Futures large speculator standing this week equaled a net position of -7,484 contracts in the data reported through Tuesday. This was a weekly lift of 9,435 contracts from the previous week which had a total of -16,919 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish with a score of 30.4 percent. The commercials are Bullish with a score of 73.2 percent and the small traders (not shown in chart) are Bearish with a score of 22.3 percent.

Copper Futures Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	28.2	42.5	7.8
– Percent of Open Interest Shorts:	32.4	38.0	8.1
– Net Position:	-7,484	7,998	-514
– Gross Longs:	50,738	76,394	14,103
– Gross Shorts:	58,222	68,396	14,617
– Long to Short Ratio:	0.9 to 1	1.1 to 1	1.0 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	30.4	73.2	22.3
– Strength Index Reading (3 Year Range):	Bearish	Bullish	Bearish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	10.2	-11.8	14.0

Platinum Futures:

The Platinum Futures large speculator standing this week equaled a net position of 15,987 contracts in the data reported through Tuesday. This was a weekly gain of 4,606 contracts from the previous week which had a total of 11,381 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish with a score of 30.6 percent. The commercials are Bullish with a score of 71.2 percent and the small traders (not shown in chart) are Bearish-Extreme with a score of 17.8 percent.

Platinum Futures Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	50.6	31.9	12.7
– Percent of Open Interest Shorts:	22.3	66.7	6.1
– Net Position:	15,987	-19,690	3,703
– Gross Longs:	28,611	18,041	7,159
– Gross Shorts:	12,624	37,731	3,456
– Long to Short Ratio:	2.3 to 1	0.5 to 1	2.1 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	30.6	71.2	17.8
– Strength Index Reading (3 Year Range):	Bearish	Bullish	Bearish-Extreme
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	18.3	-17.9	7.9

Palladium Futures:

The Palladium Futures large speculator standing this week equaled a net position of -1,867 contracts in the data reported through Tuesday. This was a weekly decline of -122 contracts from the previous week which had a total of -1,745 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish-Extreme with a score of 12.8 percent. The commercials are Bullish-Extreme with a score of 86.8 percent and the small traders (not shown in chart) are Bearish with a score of 20.4 percent.

Palladium Futures Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	22.8	54.1	13.6
– Percent of Open Interest Shorts:	45.1	27.6	17.9
– Net Position:	-1,867	2,221	-354
– Gross Longs:	1,906	4,532	1,141
– Gross Shorts:	3,773	2,311	1,495
– Long to Short Ratio:	0.5 to 1	2.0 to 1	0.8 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	12.8	86.8	20.4
– Strength Index Reading (3 Year Range):	Bearish-Extreme	Bullish-Extreme	Bearish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-4.6	5.5	-10.5

Article By InvestMacro – Receive our weekly COT Newsletter

COT Updates Metals Opinions

06 Nov

COT Bonds Speculators drop their 2-Year Bond bets to record low level

By InvestMacro

Here are the latest charts and statistics for the Commitment of Traders (COT) reports data published by the Commodities Futures Trading Commission (CFTC).

The latest COT data is updated through Tuesday November 1st and shows a quick view of how large traders (for-profit speculators and commercial hedgers) were positioned in the futures markets.

Weekly Speculator Changes led lower by Fed Funds, 2-Year & 5-Year

The COT bond market speculator bets were lower across the board this week as all eight of the bond markets we cover had lower positioning this week.

The bond markets leading the weekly declines in speculator bets this week were the Fed Funds (-89,356 contracts), the 2-Year Bond (-88,189 contracts) and the 5-Year Bond (-75,242 contracts) with the Eurodollar (-54,038 contracts), the 10-Year Bond (-50,568 contracts), the Ultra US Bond (-37,144 contracts), the Long US Bond (-18,746 contracts) and the Ultra 10-Year (-4,085 contracts) also registering lower bets on the week.

Highlighting the COT bonds data this week is the historic weakness of the 2-Year Bond speculators positioning. Large speculators dropped their bets this week for a second straight week and by the largest weekly amount since May with this week’s decline numbering -88,189 contracts. The sentiment drop has now brought the overall 2-Year Bond speculator standing to its lowest level on record at a total of -437,785 contracts, eclipsing the previous record low of -417,237 contracts registered on December 11th of 2018.

The bond markets overall were on the defensive this week as the US Federal Reserve raised their benchmark interest rate by 75 basis points for the fourth straight meeting. The 2-Year Bond, being near the short end of the yield curve, is especially sensitive to the rate change. The 2-Year front month futures price decreased to the lowest level since 2007 this week while the yield for the 2-Year hit above 5 percent (yields rise as prices fall), the highest threshold since 2007 as well.

Data Snapshot of Bond Market Traders | Columns Legend

Nov-01-2022	OI	OI-Index	Spec-Net	Spec-Index	Com-Net	COM-Index	Smalls-Net	Smalls-Index
Eurodollar	7,921,865	0	-1,950,696	17	2,217,457	81	-266,761	46
FedFunds	1,364,703	32	-17,005	38	30,796	64	-13,791	25
2-Year	2,234,148	20	-437,785	0	464,387	100	-26,602	40
Long T-Bond	1,193,687	42	-95,305	54	64,906	34	30,399	77
10-Year	3,952,205	61	-298,316	27	343,554	63	-45,238	69
5-Year	4,140,760	59	-536,987	4	629,897	90	-92,910	56

Strength Scores led by US Treasury Bond

Strength Scores (a normalized measure of Speculator positions over a 3-Year range, from 0 to 100 where above 80 is extreme bullish and below 20 is extreme bearish) show that the US Treasury Bond (53.6 percent) leads the bonds category this week. The Fed Funds (37.5 percent) comes in as the next highest bonds market in strength scores but is down from 48.6 percent from last week.

On the downside, the 2-Year Bond (0.0 percent) comes in at the lowest strength level currently and is followed by the 5-Year Bond (4.3 percent), the Ultra 10-Year Bond (7.1 percent) and the Eurodollar (17.2 percent). All four of these markets currently are in bearish extreme positioning compared to the past three years of speculator positions with scores below 20 percent.

Strength Statistics:
Fed Funds (37.5 percent) vs Fed Funds previous week (48.6 percent)
2-Year Bond (0.0 percent) vs 2-Year Bond previous week (16.8 percent)
5-Year Bond (4.3 percent) vs 5-Year Bond previous week (15.7 percent)
10-Year Bond (27.1 percent) vs 10-Year Bond previous week (34.8 percent)
Ultra 10-Year Bond (7.1 percent) vs Ultra 10-Year Bond previous week (8.2 percent)
US Treasury Bond (53.6 percent) vs US Treasury Bond previous week (59.7 percent)
Ultra US Treasury Bond (26.9 percent) vs Ultra US Treasury Bond previous week (42.0 percent)
Eurodollar (17.2 percent) vs Eurodollar previous week (18.2 percent)

Eurodollar & US Treasury Bond show positive Strength Trends

Strength Score Trends (or move index, calculates the 6-week changes in strength scores) show that the Eurodollar (5.0 percent) leads the past six weeks trends for bonds this week. The US Treasury Bond (1.4 percent) is the only other positive mover in the latest trends data.

The 2-Year Bond (-18.1 percent) leads the downside trend scores currently followed by the Ultra 10-Year Bond (-14.2 percent), 10-Year Bond (-10.4 percent), the Ultra US Treasury Bond (-9.1 percent) and the 5-Year Bond (-6.5 percent).

Strength Trend Statistics:
Fed Funds (-5.1 percent) vs Fed Funds previous week (3.0 percent)
2-Year Bond (-18.1 percent) vs 2-Year Bond previous week (1.6 percent)
5-Year Bond (-6.5 percent) vs 5-Year Bond previous week (9.0 percent)
10-Year Bond (-10.4 percent) vs 10-Year Bond previous week (16.0 percent)
Ultra 10-Year Bond (-14.2 percent) vs Ultra 10-Year Bond previous week (-18.9 percent)
US Treasury Bond (1.4 percent) vs US Treasury Bond previous week (6.0 percent)
Ultra US Treasury Bond (-9.1 percent) vs Ultra US Treasury Bond previous week (-1.8 percent)
Eurodollar (5.0 percent) vs Eurodollar previous week (18.1 percent)

Individual Bond Markets:

3-Month Eurodollars Futures:

The 3-Month Eurodollars large speculator standing this week reached a net position of -1,950,696 contracts in the data reported through Tuesday. This was a weekly reduction of -54,038 contracts from the previous week which had a total of -1,896,658 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish-Extreme with a score of 17.2 percent. The commercials are Bullish-Extreme with a score of 80.7 percent and the small traders (not shown in chart) are Bearish with a score of 45.7 percent.

3-Month Eurodollars Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	7.4	67.7	4.7
– Percent of Open Interest Shorts:	32.1	39.7	8.1
– Net Position:	-1,950,696	2,217,457	-266,761
– Gross Longs:	589,471	5,361,762	371,189
– Gross Shorts:	2,540,167	3,144,305	637,950
– Long to Short Ratio:	0.2 to 1	1.7 to 1	0.6 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	17.2	80.7	45.7
– Strength Index Reading (3 Year Range):	Bearish-Extreme	Bullish-Extreme	Bearish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	5.0	-5.2	4.3

30-Day Federal Funds Futures:

The 30-Day Federal Funds large speculator standing this week reached a net position of -17,005 contracts in the data reported through Tuesday. This was a weekly decline of -89,356 contracts from the previous week which had a total of 72,351 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish with a score of 37.5 percent. The commercials are Bullish with a score of 63.6 percent and the small traders (not shown in chart) are Bearish with a score of 24.5 percent.

30-Day Federal Funds Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	10.3	73.5	1.8
– Percent of Open Interest Shorts:	11.6	71.2	2.8
– Net Position:	-17,005	30,796	-13,791
– Gross Longs:	140,920	1,002,689	25,091
– Gross Shorts:	157,925	971,893	38,882
– Long to Short Ratio:	0.9 to 1	1.0 to 1	0.6 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	37.5	63.6	24.5
– Strength Index Reading (3 Year Range):	Bearish	Bullish	Bearish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-5.1	5.8	-17.6

2-Year Treasury Note Futures:

The 2-Year Treasury Note large speculator standing this week reached a net position of -437,785 contracts in the data reported through Tuesday. This was a weekly decline of -88,189 contracts from the previous week which had a total of -349,596 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish-Extreme with a score of 0.0 percent. The commercials are Bullish-Extreme with a score of 100.0 percent and the small traders (not shown in chart) are Bearish with a score of 40.2 percent.

2-Year Treasury Note Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	7.4	82.0	7.6
– Percent of Open Interest Shorts:	27.0	61.2	8.8
– Net Position:	-437,785	464,387	-26,602
– Gross Longs:	164,982	1,831,669	169,031
– Gross Shorts:	602,767	1,367,282	195,633
– Long to Short Ratio:	0.3 to 1	1.3 to 1	0.9 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	0.0	100.0	40.2
– Strength Index Reading (3 Year Range):	Bearish-Extreme	Bullish-Extreme	Bearish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-18.1	4.9	30.9

5-Year Treasury Note Futures:

The 5-Year Treasury Note large speculator standing this week reached a net position of -536,987 contracts in the data reported through Tuesday. This was a weekly decrease of -75,242 contracts from the previous week which had a total of -461,745 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish-Extreme with a score of 4.3 percent. The commercials are Bullish-Extreme with a score of 90.1 percent and the small traders (not shown in chart) are Bullish with a score of 55.5 percent.

5-Year Treasury Note Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	5.1	86.0	7.6
– Percent of Open Interest Shorts:	18.1	70.8	9.8
– Net Position:	-536,987	629,897	-92,910
– Gross Longs:	213,179	3,559,701	313,942
– Gross Shorts:	750,166	2,929,804	406,852
– Long to Short Ratio:	0.3 to 1	1.2 to 1	0.8 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	4.3	90.1	55.5
– Strength Index Reading (3 Year Range):	Bearish-Extreme	Bullish-Extreme	Bullish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-6.5	-1.2	14.5

10-Year Treasury Note Futures:

The 10-Year Treasury Note large speculator standing this week reached a net position of -298,316 contracts in the data reported through Tuesday. This was a weekly fall of -50,568 contracts from the previous week which had a total of -247,748 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish with a score of 27.1 percent. The commercials are Bullish with a score of 62.7 percent and the small traders (not shown in chart) are Bullish with a score of 69.3 percent.

10-Year Treasury Note Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	11.9	76.5	9.1
– Percent of Open Interest Shorts:	19.5	67.8	10.2
– Net Position:	-298,316	343,554	-45,238
– Gross Longs:	471,166	3,021,952	357,967
– Gross Shorts:	769,482	2,678,398	403,205
– Long to Short Ratio:	0.6 to 1	1.1 to 1	0.9 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	27.1	62.7	69.3
– Strength Index Reading (3 Year Range):	Bearish	Bullish	Bullish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-10.4	0.1	16.0

Ultra 10-Year Notes Futures:

The Ultra 10-Year Notes large speculator standing this week reached a net position of -83,431 contracts in the data reported through Tuesday. This was a weekly decline of -4,085 contracts from the previous week which had a total of -79,346 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish-Extreme with a score of 7.1 percent. The commercials are Bullish-Extreme with a score of 81.6 percent and the small traders (not shown in chart) are Bullish with a score of 75.4 percent.

Ultra 10-Year Notes Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	7.9	80.4	11.0
– Percent of Open Interest Shorts:	13.9	68.8	16.6
– Net Position:	-83,431	161,124	-77,693
– Gross Longs:	109,513	1,118,917	153,574
– Gross Shorts:	192,944	957,793	231,267
– Long to Short Ratio:	0.6 to 1	1.2 to 1	0.7 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	7.1	81.6	75.4
– Strength Index Reading (3 Year Range):	Bearish-Extreme	Bullish-Extreme	Bullish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-14.2	2.3	30.2

US Treasury Bonds Futures:

The US Treasury Bonds large speculator standing this week reached a net position of -95,305 contracts in the data reported through Tuesday. This was a weekly lowering of -18,746 contracts from the previous week which had a total of -76,559 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bullish with a score of 53.6 percent. The commercials are Bearish with a score of 33.8 percent and the small traders (not shown in chart) are Bullish with a score of 76.7 percent.

US Treasury Bonds Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	5.6	79.2	14.3
– Percent of Open Interest Shorts:	13.6	73.7	11.7
– Net Position:	-95,305	64,906	30,399
– Gross Longs:	67,408	945,230	170,536
– Gross Shorts:	162,713	880,324	140,137
– Long to Short Ratio:	0.4 to 1	1.1 to 1	1.2 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	53.6	33.8	76.7
– Strength Index Reading (3 Year Range):	Bullish	Bearish	Bullish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	1.4	-5.0	7.8

Ultra US Treasury Bonds Futures:

The Ultra US Treasury Bonds large speculator standing this week reached a net position of -388,166 contracts in the data reported through Tuesday. This was a weekly lowering of -37,144 contracts from the previous week which had a total of -351,022 net contracts.

This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish with a score of 26.9 percent. The commercials are Bullish with a score of 77.8 percent and the small traders (not shown in chart) are Bullish with a score of 74.7 percent.

Ultra US Treasury Bonds Statistics	SPECULATORS	COMMERCIALS	SMALL TRADERS
– Percent of Open Interest Longs:	5.9	82.6	11.4
– Percent of Open Interest Shorts:	32.7	59.4	7.8
– Net Position:	-388,166	335,892	52,274
– Gross Longs:	85,681	1,198,023	165,861
– Gross Shorts:	473,847	862,131	113,587
– Long to Short Ratio:	0.2 to 1	1.4 to 1	1.5 to 1
NET POSITION TREND:
– Strength Index Score (3 Year Range Pct):	26.9	77.8	74.7
– Strength Index Reading (3 Year Range):	Bearish	Bullish	Bullish
NET POSITION MOVEMENT INDEX:
– 6-Week Change in Strength Index:	-9.1	3.0	13.5

Article By InvestMacro – Receive our weekly COT Newsletter

Bonds COT Updates Opinions

04 Nov

Fed faces twin threats of recession and financial crisis as its inflation fight raises risks of both

By D. Brian Blank, Mississippi State University

There is wide agreement among economists and market observers that the Federal Reserve’s aggressive interest rate hikes will cause economic growth to grind to a halt, leading to a recession. Less talked about is the risk of a financial crisis as the U.S. central bank simultaneously tries to shrink its massive balance sheet.

As expected, the Fed on Nov. 2, 2022, lifted borrowing costs by 0.75 percentage point – its fourth straight hike of that size, which brings its benchmark rate to as high as 4%.

At the same time as it’s been raising rates, the Fed has been quietly trimming down its balance sheet, which swelled after the COVID-19 pandemic began in 2020. It reached a high of US$9 trillion in April 2022 and has since declined by about $240 billion as the Fed reduces its holdings of Treasury securities and other debt that it bought to avoid an economic meltdown early in the pandemic.

As a finance expert, I have been studying financial decisions and markets for over a decade. I’m already seeing signs of distress that could snowball into a financial crisis, compounding the Fed’s woes as it struggles to contain soaring inflation.

Fed balance sheet basics

As part of its mandate, the Federal Reserve maintains a balance sheet, which includes securities, such as bonds, as well as other instruments it uses to pump money into the economy and support financial institutions.

The balance sheet has grown substantially over the last two decades as the Fed began experimenting in 2008 with a policy known as quantitative easing – in essence, printing money – to buy debt to help support financial markets that were in turmoil. The Fed again expanded its balance sheet drastically in 2020 to provide support, or liquidity, to banks and other financial institutions so the financial system didn’t run short on cash. Liquidity refers to the efficiency with which a security can be converted into cash without affecting the price.

But in March 2022, the Fed switched gears. It stopped purchasing new securities and began reducing its holdings of debt in a policy known as quantitative tightening. The current balance is $8.7 trillion, two-thirds of which are Treasury securities issued by the U.S. government.

The result is that there is one less buyer in the $24 trillion treasury market, one of the largest and most important markets in the world. And that means less liquidity.

Loss of liquidity

Markets work best when there’s plenty of liquidity. But when it dries up, that’s when financial crises happen, with investors having trouble selling securities or other assets. This can lead to a fire sale of financial assets and plunging prices.

Treasury markets have been unusually volatile this year – resulting in the biggest
losses in decades – as prices drop and yields shoot up. This is partly due to the Fed rate hikes, but another factor is the sharp loss of liquidity as the central bank pares its balance sheet. A drop in liquidity increases risks for investors, who then demand higher returns for financial assets. This leads to lower prices.

The loss of liquidity not only adds additional uncertainty into markets but could also destabilize financial markets. For example, the most recent quantitative tightening cycle, in 2019, led to a crisis in overnight lending markets, which are used by banks and other financial institutions to lend each other money for very short periods.

Given the sheer size of the Treasury market, problems there are likely to leak into virtually every other market in the world. This could start with money market funds, which are held as low-risk investments for individuals. Since these investments are considered risk-free, any possible risk has substantial consequences – as happened in 2008 and 2020.

Other markets are also directly affected since the Fed holds more than just Treasuries. It also holds mortgages, which means its balance sheet reduction could hurt liquidity in that market too. Quantitative tightening also decreases bank reserves in the financial system, which is another manner in which financial stability could be threatened and increase the risk of a crisis.

The last time the Fed tried to reduce its balance sheet, it caused what was known as a “taper tantrum” as debt investors reacted by selling bonds, causing bond yields to rise sharply, and forced the central bank to reverse course. The long and short of it is that if the Fed continues to reduce its holdings, it could stack a financial crisis on top of a recession, which could lead to unforeseen problems for the U.S. economy – and economies around the globe.

A two-front war

For the moment, Fed Chair Jerome Powell has said he believes markets are handling its balance sheet rundown effectively. And on Nov. 2, the Fed said it would continue reducing its balance sheet – to the tune of about $1.1 trillion a year.

Obviously, not everyone agrees, including the U.S. Treasury, which said that the lower liquidity is raising government borrowing costs.

The risks of a major crisis will only grow as the U.S. economy continues to slow as a result of the rate hikes. While the fight against inflation is hard enough, the Fed may soon have a two-front war on its hands.

About the Author:

D. Brian Blank, Assistant Professor of Finance, Mississippi State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economics & Fundamentals Opinions

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