Aluminium continued to defy the bearish consensus last week with the market structure tightening up ahead of what may prove to be a big showdown on this week's December prompt date and 3-month metal attacking the upside.
The key talking point in London remains the dominant position holder, who is still in the 50-80% band of cumulative cash, tom/next and warrant positions relative to open tonnage in the LME system. Or at least he was still there as of last Thursday—the LME's reports are back-dated two days for reasons of market-sensitivity.
That's keeping everyone on tenterhooks in the countdown to Wednesday and is a key reason the market's nearby market structure has shifted back to backwardation after spending most of this year in contango.
The benchmark cash-3s period ended last week valued at $26 backwardation, compared with $11 backwardation the previous Friday.
Nearby spreads were highly active throughout last week, even when 3-month metal was oscillating quietly around the $2,800 level in the first part of the week. There were sporadic flare-ups in the Dec-Jan spread, although it ended the week valued unchanged at $4 contango, the only major component of the cash-3s period to do so.
Rather, the tightness spilled over into the first quarter of next year with Jan-Feb ending Friday valued at $16 backwardation and Feb-3-months at $13 backwardation. It's worth noting that the tightening of the front part of the forward curve took place even with the monthly roll of the Goldman Sachs index fund, which normally serves to loosen things up a bit.
Can It Get There?
The recent counter-intuitive rally and the games being played across the spreads seem to have triggered a wide-ranging readjustment of positions all the way into the first part of next year and more will surely come if 3-month metal pushes higher still towards the "magic number" at $3,000.
It's not yet clear if it has the momentum to take out the producer selling that capped the action last week around the $2,860 level.
That's a key number for market technicians, representing a 50% retracement of the fall to the September low of $2,405, and a break is widely seen likely to herald a wave of buying from the systematic fund community and other chart-followers.
After holding station around $2,800 over Monday-Wednesday last week, 3-month aluminium made a concerted drive for that resistance level on Thursday with outright buying, Q1 options buying and spread borrowing all contributing to the cause.
It got there with a close of $2,864 but couldn't hold its footing in the face of continued producer sales and short-term profit-taking. The slump all the way back to $2,803 at Friday's close represented a week-to-week loss of $22 and has left many on the London “street” scratching their heads as to whether that's it or just an opening shot.
The systematic fund community has moved back to marginal long exposure having been forced to buy back its short positions on the rally up from the September lows. It was notable that the black-box brethren were active on the buy-buttons when aluminium was building up for Thursday's upside attack, although it will probably have been quick to react to the weak end-week close.
Should It Get There?
The $64,000 question, or in aluminium's case, the $3,000 question, is whether we are seeing a short-term move based on a clever reading of the market's technicals or whether this recent move is justified by fundamentals.
The short term answer is that it probably is. LME stocks last week fell to their lowest level since January, not least thanks to that nicely-timed mass cancellation activity at Singapore—just before the first-Wednesday option declaration date.
Physical market premiums remain robust in Europe and steady in Asia, leaving the US as the weak spot right now—unsurprisingly given the carnage in the country's automotive and residential housing sectors. Strength in the forme
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