For the first time in eight years, a net short position in commodities! What did the hedge funds sniff out?

Hedge funds have for the first time since 2016 significantly shifted to a net short position in commodity futures, reflecting heightened pessimism towards raw material demand amid concerns of economic slowdown. This selling frenzy is primarily driven by traders unwinding a large number of long positions.

According to data compiled by the U.S. Commodity Futures Trading Commission (CFTC), as of the week ending July 30th, fund managers held nearly 58,600 net short contracts betting against a basket of 20 commodity prices. Over the past 8 years (including the peak of the pandemic), investors' related positions have consistently been in a net long state.

Hedge funds net short commodities for the first time in eight years

This reversal highlights the increasing pessimism about global economic growth. Algorithmic selling in the oil market has exacerbated this situation.

The Bloomberg Commodity Index, which tracks a basket of energy, agricultural, and metal futures, has fallen by 4% year-to-date in 2024, reversing earlier gains this year. The index dropped by 13% in 2023, marking the largest decline in five years.

Copper, considered a barometer of the global economy due to its widespread use in construction, infrastructure, and manufacturing, has seen a significant decline (nearly 20% from its record high of over $11,000 per ton in May), sending a particularly pessimistic signal to investors. Other base metals such as aluminum, lead, and zinc have also followed suit in the decline.

Tracey Allen, a commodity strategist at JP Morgan, stated that the lack of significant policy support in July reinforced expectations of weak demand, leading to significant selling pressure on copper and base metals.

The massive sell-off in the commodity market marks a sharp reversal, as some commodities including copper reached record highs due to a surge in investor inflows, forcing short sellers to cover their positions. Following faster-than-expected U.S. inflation in March, many traders were also drawn to copper as a hedge against inflation.

While the threat of broader conflicts in the Middle East briefly boosted the commodity market last week after the killing of Hamas political leader, the market has once again turned lower as global economic growth prospects dim.

Ole Hansen, Head of Commodity Strategy at Saxo Bank, stated, "The short-term outlook is not optimistic." He also pointed out that the recent decline in stock markets has led some fund managers to reduce their holdings in other assets.

Some analysts believe that the strong U.S. dollar (most commodities are priced in dollars), uncertainty surrounding the U.S. presidential election, and market volatility in other regions of the world have all put pressure on commodity prices