Hedge funds’ speculative positions are at “pretty elevated levels” in commodities amid signs of ample inventories in some materials and concerns over the outlook for demand in China, according to JPMorgan Chase & Co.
Momentum measures and futures positioning in some assets are likely to turn “incrementally more negative,” especially for base metals, said Nikolaos Panigirtzoglou, global market strategist at JPMorgan. In March, the Bloomberg Commodity Index posted the biggest monthly loss since July. These charts show why a sell-off among hedge funds could emerge in coming months.
1. Crude Retrenchment
Speculative positions in crude oil “have declined from overbought to average levels, but we see a risk of further downshifting,” JPMorgan said in a March 31 report. “In all the previous swings, oil positions did not stay at average levels, but swung from overbought to oversold levels and vice versa.”
2. Short Interest on Stocks
Speculators have been reducing short interest on the biggest commodity equities. A review of five of the biggest global commodity stocks shows short interest in those companies has slipped significantly since last year, which Panigirtzoglou said suggests the sector may be overbought.
Stock % Change in Short Interest (Jan. 4, 2016-March 31, 2017) BHP Billiton -14 Rio Tinto -77 Glencore -88 Vale -74 Barrick Gold -90
Source: Data compiled by Bloomberg, Markit data
3. Palladium Signals
Speculators have been bullish on palladium. Net-long positions in futures and options contracts are at elevated levels, and the commodity appears “overbought,” Panigirtzoglou said. Futures of the metal used in automotive pollution-control devices touched the highest in two years on Wednesday, even after carmakers posted a surprise sales decline in March as discounts failed to buoy demand.
4. Metals Momentum