It’s the beginning of the yr and meaning index rebalancing flows. An enormous one on the radar proper now’s the Bloomberg Commodity Index (BCOM), and the flows this yr are giant.
Scotiabank is out with a notice breaking down the flows, which begin tomorrow and run by Jan 14, with 20% of the shopping for/promoting completed every day.
As common, this can be a case of ‘promote the winners, purchase the losers’, which is one thing we’re not-coincidentally seeing in different markets as properly. As a result of valuable metals ripped greater final yr whereas crude oil struggled, the index has to regulate again to focus on weights. Meaning promoting what went up and shopping for what went down.
Breakdown of the estimated flows:
The Sells:
Mixed, that’s over $14 billion in notional promoting strain hitting the dear metals advanced over 5 days. Scotiabank notes that whereas quantity in silver has been excessive just lately (because of new all-time highs), this commerce nonetheless represents about 17% of open curiosity on March futures.
I do not assume this was a shock however perhaps it helps s to elucidate a few of the promoting in silver in the present day.
The Buys:
- Brent crude:+$3.6 billion (58k contracts)
- WTI crude:+$2.4 billion (42k contracts).
- Cocoa:+$2.2 billion.
Be careful for Cocoa
Essentially the most crowded commerce relative to the market may truly be in Cocoa. It’s returning to the benchmark index for the primary time since 2005. The shopping for movement there represents 56% of open curiosity and a couple of.8x the common day by day quantity. Anticipate some actual volatility there in a market that is been unusually quiet currently.
cocoa futures
The takeaway
Often, you’d count on this sort of provide overhang to crush gold and silver costs. Nevertheless, Scotiabank takes a unique view. They argue that fundamentals stay a tailwind for metals and recommend shopping for on any weak spot brought on by these flows.
On the flip aspect, they’re bearish on Crude regardless of the shopping for strain, citing extra provide capability and a sluggish demand outlook.
The rebalancing begins on the shut on Thursday.
