As the world’s major central banks drift further away from the tightening path, risk assets such as stocks and cryptocurrencies bear the brunt of the blow. Now the latest fire has turned to commodities, whose prices are plunging from record highs on expectations of weaker demand, after fears of a recession looming over higher borrowing costs.
Following WTI crude’s “100-break” on Tuesday, Brent crude oil also fell below the $100 mark for the first time since April on Wednesday, down 29% from its recent high.
The performance of other commodities is hardly optimistic. Among them, the S&P GSCI agricultural commodity price index has fallen by 28% since it hit a record high in mid-May, and the benchmark price of the London Metal Exchange (LME) tracking six industrial metals has fallen by a third since peaking in March. one.
In the recent downturn in commodities, hedge funds have been playing a central role, and have “overturned”.
Hedge funds are turning fast
According to the media, David Whitcomb, research director at research firm Peak Trading Research, said that while physical supplies of many raw materials remain tight, “hedge funds are pulling back and (they) are leading the market to see a lot of liquidation.
Doug Greenig, former chief risk officer and founder of the AHL division of investment management firm Man Group, said the positions were bets on a drop in prices in the short to medium term “as the market starts to focus on the huge risk of a hard landing,” he said. Refers to a sharp economic downturn.
Aspect Capital, a well-known overseas private equity fund with $10.6 billion under management, is also in action, and has been shorting commodities such as copper, silver, iron ore and steel since early May on expectations that a global economic slowdown will cause their prices to fall.
In terms of agricultural products, Aspect Capital has continued to short sugar and cocoa, and has been shorting wheat slightly recently.
André Honig, executive director of quantitative hedge fund Transtrend, said:
Our plans have shifted in recent months as markets become increasingly concerned about the secondary effects of inflation.
He was referring to the impact of high prices on demand for certain commodities.
In addition, the U.S. Commodity Futures Trading Commission (CFTC) said in its latest report that a total of 153,660 agricultural futures contracts worth $8.2 billion were cleared in the week ended June 28. It was the second largest sell-off in long positions on record , according to Peak Trading Research .
The energy market staged a “long and short war”
In energy markets, traders also began to weigh supply risks and weak demand. As a result, brent has fallen by around 10% this week alone.
In response to the future trend of oil prices, the big Wall Street banks are in a “long-short war”.
Citigroup warned on Tuesday that oil prices could fall to $65 a barrel by the end of the year if there is a recession .
But JPMorgan believes that if Russia removes 5 million barrels a day from the market, oil prices could soar to $380 a barrel in the most extreme scenario.
“Famous commodity bulls” Goldman Sachs commented that because the global supply gap has not been resolved, oil prices have been “overshoot”, and it is too early for oil prices to decline due to recession fears.
Metal market unspeakably optimistic copper net shorts hit the highest in 2015
At the same time in the metal market, copper fell 4.2% to a 19-month low on Tuesday, and the price of copper fell again to above $7,500 a ton on Wednesday, a decline of more than 20% this year, and a record of $10,600 a ton set in April this year. The record highs are in stark contrast.
Short bets on copper are now at their highest level since 2015, data from commodities broker Marex showed . Hedge funds had a net short position of 60,000 copper contracts, or 1.5 million tonnes, across all markets at the end of June, up from 4,000 contracts in early May.
Guy Wolf, head of global market analysis at Marex, said the increase in short positions was largely driven by trend-following quantitative funds, “which is a pretty big short position.”
George Cheveley, a portfolio manager at Ninety One, said recent concerns about the demand outlook have distracted investors from the long-term energy transition story that propelled copper to record highs three months ago.
Cheveley mentions:
The market looks six months into the future and says if orders don’t pick up…then we’re going to have more inventories and things look worse…you have to expect a very pessimistic outlook to make that assumption , but the market is now ready to believe it.
Geordie Wilkes, head of research at Sucden Financial Ltd., said:
We’re expecting more downside for copper… we’re not in a recession yet, but we’re definitely going to see slower growth, so copper prices won’t see any substantial rebound from here.