The Daily Update - Oil and bonds 'who is Mr Right'

It would appear that hedge funds have been cutting their bets on a higher oil price over the last several weeks as concern for a global economic downturn continues. West Texas Intermediate (WTI) crude has fallen for seven straight weeks, the longest run of declines since 2015 and Brent is just above the levels last seen in April.

The reasons are the continued worries over contagion from the US Turkey rift and the intensifying tariff clash between China and the US where talks are due to start again in Washington later this month. Some are talking of a $20 to $30 drop in oil prices due to a worldwide recession as the uncertainty and risk of a global economic slowdown is gradually being priced into the market. Hedge funds net-longs in WTI fell 9.8% the largest drop since May according to the Commodity Futures Trading Commission (CFTC) and it is reported that net long positions in gasoline have been cut by around 14%.

Almost the reverse of the concerns in the oil market are the shorts that have been established in 10 year US Treasuries. The CFTC reported that the net short positions in the 10 year contract hit the highest level on record which is kind of strange given that the ten year yield has dropped around 14 bp since the end of July, dropping from 3% to 2.86% this morning in London.

Does this reflect underlying demand for the US bond market? That is a big question but the fact the market continues to rally in price even with the selling in the futures contract is a little surprising; this could be the development of one all-mighty short squeeze should yields continue to fall and contract shorts hit stop losses.

With the S&P 500 trading just short of this year’s highs, shorts being established in the bond market and the US dollar at one year highs it would appear there is an element of complacency in US assets while the oil market is taking a rather more pessimistic stance towards the economic outlook.

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