Sugar, forex & equities

Commercial traders in sugar futures have set another net long record position. The October futures contract has successfully defended the low mentioned last month, and the commercial traders appear to be forcing the weaker speculative positions out of the market. There is a growing disparity between the Indian sugar market supplies as reported by mainstream news versus what appears to be popping up on smaller grassroots sites. Many agencies have been calling for an increase because last year’s El Niño hindered production by at least 15%. However, the commercial sugar refiners don’t seem to trust what they’re hearing. The record-setting purchases by the sugar mills along with a widening spread between the October 2017 and March 2018 sugar contracts are both indications of near-term tightness. We expect the October sugar futures to continue to rally through the last trading day (Sept. 29).

Currencies: The currency markets have finally had some directional movement and are testing multi-year levels. Thus far, we’ve seen standard actions by the commercial traders who are scaling into their trades on a counter-trend basis.

The U.S. Dollar Index is threatening its 2016 low near 91.50. Commercial traders maintained a net short position greater than 50,000 contracts the entire time the Dollar Index was trading above 100. However, net commercial purchases since mid-June are threatening to push the commercial trader net position into positive territory for the first time since early 2014. We expect commercial buying to show up at the lows, but their mid-range total position size indicates they are not ready to commit to a dollar bottom, yet.

The euro is testing its August 2015 high around $1.20 and is clearly being pushed by speculators as they are long 1.85 contracts for every contract they’re short. This is the most bullish speculative COT ratio since November 2013. This is an overbought indication. Commercial short-selling could quickly force speculative losses on a decline to near-term support around $1.12.

Stocks  vs.  bonds: Money flowing into the stock market equals “risk on.” Money moving from the stock market to the long side of the bond market equals “risk off.” Based on the action, we’re seeing in the COT report, we want to do two things. First, we don’t think bonds will attain the new high we mentioned previously. However, we do still expect to be able to sell them above June’s high. A pullback in the stock market, specifically the December Dow Jones futures, is inevitable. Speculators are long the Dow futures at an eight-to-one ratio. Speculators being washed out of their Dow positions are likely to funnel money into interest rate futures. The commercial traders are typically one step ahead of the speculators. Therefore, expect commercial traders to initiate short interest rate positions on a speculative flight to quality.   

A look at long-term trends of commercial interest in the CFTC’s “Commitments of Traders” report.