Hedge funds positioned for commodity sell-off: Aus shares to open higher

US equities were mostly higher in Wednesday trading, ending off their best levels though. The S&P 500, however, capped off its first three-day streak of gains since late May.

The Dow Jones Industrial Average gained 69.86 points, or 0.23 per cent, to 31,037.68. The S&P 500 added 0.36 per cent to 3,845.08. The tech-centric Nasdaq Composite rose 0.35 per cent to close at 11,361.85.

Stocks bounced after the Federal Reserve released the minutes from its June meeting, showing that the central bank was committed to bringing down inflation. Fed members said the meeting in late July would likely see another 50- or 75-basis point move, the minutes showed.

A big concern right now is that the Fed is tightening into a slowdown and at risk of a policy mistake.

In addition, there is a lot of worry surrounding the upcoming Q2 earnings season, amid concerns that consensus estimates are too high given the combination of slowing growth, tightening financial conditions and lingering price pressures.

Across the sectors, defensive plays and utilities were some of the best performers on Wednesday.

High-quality tech stocks also performed well, with Cisco Systems and Adobe each adding 1.7 per cent and Microsoft gaining 1.3 per cent.

Energy stocks were some of the worst performers on the day, as oil prices continued their recent slide. Shares of Chevron slipped 1.3 per cent, and Diamondback Energy fell 3.4 per cent.

WTI crude settled down 1.0 per cent, having earlier fallen to $95 a barrel, the lowest level since 12 April, with a number of moving pieces in focus. Of note, oil has plummeted alongside other commodities in recent days as part of an unwinding of a broader inflation hedge. That said, hedge funds appear to be ahead of the inflation commodity trade and have bet against commodities such as copper, silver, iron ore, sugar, wheat and steel since around early May, with prices now being sold off in anticipation of a global economic slowdown.

In the week of June 28 a total of 153,660 agricultural futures contracts worth $8.2bn were liquidated, the US Commodity Futures Trading Commission said in its latest report. This was the second-biggest sell-off of long positions on record. This marks a sharp turnaround from the fierce rallies in commodities markets earlier in 2022, when raw material prices were pushed higher by a post-pandemic bounce, lack of investment in new energy and mining assets, and supply constraints exacerbated by Russia’s invasion of Ukraine.

Hedge funds have been central to the recent price declines across commodities — selling out of long positions in certain commodities and are now replacing them with short positions. Expect further volatility in the energy market, as traders weigh up risks to supply against the likelihood of a demand-sapping recession. It appears that investment banks are predicting a wide spread in the oil price. Citi cautioned on Tuesday that if there is a recession, oil could fall to $US65 by year-end. while JPMorgan has argued there is a risk Russia will purposely cut global supply, with the bank warning oil could soar to $380.

One Australian dollar has weakened on commodity weakness, buying 67.80 US cents. With the US dollar stronger on the major crosses, the dollar index is near two-decade highs.

Copper prices slid to their lowest in almost 20 months as persistent worries that a recession will dampen metals demand hit a market with thin summer volumes.
 
The SPI futures are pointing to a 0.6 per cent gain.

Figures around the globe

US markets closed higher. The Dow Jones gained 0.2 per cent to 31,038, the S&P 500 gained 0.4 per cent to 3,845 and the Nasdaq gained 0.4 per cent to 11,362.

Across the Atlantic, European markets closed higher. Paris rose 2 per cent, Frankfurt added 1.6 per cent and London’s FTSE gained 1.1 per cent.

Asian markets closed lower. Tokyo’s Nikkei fell 1.2 per cent, Hong Kong’s Hang Seng lost 1.2 per cent and China’s Shanghai Composite lost 1.4 per cent.

Yesterday, the Australian sharemarket fell 0.5 per cent to 6,594.

Dividends payable

There are three companies set to pay eligible shareholders today:

NAB Capital Notes 2 (ASX:NABPD)
Sietel (ASX:SSLPA)
360 Capital Enhanced Income Fund (ASX:TCF)

Commodities

Iron ore is trading 1.7 per cent lower at US$112.35 a ton.

Iron ore futures are pointing to a 2.1 per cent rise.

Gold lost $27.40 or 1.6 per cent to US$1,737 an ounce.

Silver was up $0.04 or 0.2 per cent to US$19.16 an ounce.

Oil fell $0.97 or almost 1 per cent to US$98.53 a barrel.

On the London Stock Exchange, Rio gained 1 per cent, BP lost 1.3 per cent and Shell lost 2.1 per cent.

Currencies

One Australian dollar at 7:10 AM has weakened compared to the US dollar since yesterday, buying 67.80 US cents (Wed: 68.02 US cents), 56.90 Pence Sterling, 92.20 Yen and 66.58 Euro cents.