London aluminium buckled but in the end didn’t break out of the upper confines of its recent range under the weight of the fund selling spree that washed across the metals complex last week.
That “wall of money” hit the LME metals in successive waves from Monday through Thursday, the storm only abating on Friday. At the low point—for all the metals, led by copper—on late Thursday, LME 3-month aluminium briefly sank to the $2,780 level. It bounced straight back up and closed Friday out valued at $2,850. That marked a negligible week-to-week loss of $25, in stark contrast to the bashing meted out to the likes of copper and zinc.
Aluminium was by no means immune to the herd movement of the CTA systematic funds last week. Our sources estimate that they reduced their collective long exposure to the light metal from around 20% of historic capacity to around 5% last week. That’s a big shift in positioning, equivalent to something like 335,000t.
Quite what sparked the stampede is a little difficult to pinpoint. Certainly, there was a noticeable shift of fund flows around the previous week’s US Fed interest rate meeting. Although there were no surprises that the Fed left rates unchanged, a more hawkish than expected accompanying statement seems to have meant a(nother) deferral of expectations as to when the Fed will start loosening monetary policy.
This seems to have opened the door to a shift in fund portfolios but once the selling in the likes of the metals is in full swing, the movement becomes self-fulfilling. Every new wave of liquidation causes a deterioration in the technical signals off which the CTAs trade, leading to more liquidation, leading to further deterioration, etc etc.
The most interesting point about aluminium’s performance last week was that so little damage was done to prices given the wholesale exit of short- to medium-term fund money.
The easiest answer—and one already postulated by many analysts—is that having under-performed relative to the likes of copper, aluminium was less over-heated and therefore had less to give back.
That’s true as far as it goes but the existence of that dominant long position holder in the 50-80% band of LME’s daily compliance report and the market knowledge that it and maybe others have an appointment with the June options expiration may also have a lot to do with the market’s relative resilience to the fund stampede.
China – No Change
Another reason for aluminium’s relative insouciance to the blood-letting on copper may be the differing expectations of the two markets when it comes to China.
Although copper’s fall last week was defined by the same technical selling as seen on aluminium, it was overlaid with concerns about China, specifically that the country’s huge imports of refined metal this year have left it awash with the stuff. This represents a significant about-turn in the copper market’s perception of the country. Up until last week, the early monthly snapshot of the Chinese trade data was seized upon by market bulls as evidence that China was taking up any slack caused by the slow US economy. Last week, another strong set of import figures caused a prolonged bout of gloom.
But the aluminium market’s concerns about China are centred not on how much metal it is going to import but on how much metal it is going to export. And last week’s figures out of the country simply signaled no change. Alumina production is still rocketing. As a result so too is primary metal production. Primary metal exports remain low. Exports of product remain super-strong…and will until such time as the authorities make good on their long-promised action on export tax differentials. The country’s internal rate of consumption also remains super-strong, but then we knew that, didn’t we?
With fewer hopes built on China, aluminium was more immune to the shift of per
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