Hedge funds and money managers have turned predominantly bearish on commodities futures for the first time since 2016. They hold a net position of almost 58,600 contracts used to bet on lower prices for a basket of 20 raw materials. This reversal in sentiment is driven by concerns about economic growth in China, ampler supplies of key commodities, conflicts in Europe and the Middle East, and an algorithmic sell-off in the oil market. The Bloomberg Commodity Index is down 4% in 2024 and fell 13% in 2023 [c386a232].
This shift in sentiment among hedge funds and money managers reflects the changing market conditions and the impact of various factors on commodity prices. The concerns about economic growth in China, conflicts in Europe and the Middle East, and ampler supplies of key commodities have contributed to the bearish outlook. Additionally, an algorithmic sell-off in the oil market has further intensified the negative sentiment. These factors have led hedge funds and money managers to bet on lower prices for a basket of 20 raw materials [c386a232].
The bearish stance on commodities is a departure from the previous sentiment among hedge funds and money managers. In recent weeks, they have also increased their bearish bets on US crude oil as prices dropped to the lowest level in over seven weeks. Money managers' position in West Texas Intermediate (WTI) decreased, marking the third consecutive week of declines. Hedge funds, on the other hand, raised their bets against crude to the highest level since January. These adjustments in positions reflect the changing sentiment among investors and traders as crude oil prices continue to decline [fe20cbf2] [9c5f60d3].
In addition to commodities, hedge funds and foreign exchange speculators have also reduced their bearish bets against the US dollar. The net short position has decreased, marking the largest level since August. Speculators have also adjusted their positions in other commodities, reducing their net long positions in gold and NYMEX WTI crude oil, while increasing their net long positions in ICE Brent crude oil [c1a2caaf] [44a5558f].
Furthermore, short sellers have recouped losses of more than $25 billion in the last 30 days as the rally in US stocks loses steam. The receding bets of an early interest rate cut by the US Federal Reserve triggered a selloff in the equity market, allowing short sellers to cover a portion of their heavy losses from last year. The benchmark S&P 500 index is down about 5% in April and off by a similar margin from its record high. Overall US & Canadian equity short exposure fell in the last 30 days. Short positions on MicroStrategy and chip stocks were profitable, while short positions on Exxon Mobil, Alphabet, and Amazon.com were least profitable [f6331b42].
The bear market in commodities is deepening, with the BCOM index recently breaking support. If the index included iron ore and coal, it would look even worse. BCA Research has also downgraded commodities, indicating a further decline in prices. While the next US recession may not be particularly deep, there are structural imbalances that suggest the US economy will not be able to avoid a downturn altogether. These factors contribute to the ongoing bearish sentiment in the commodities market [3c17a386].