MI WEEK IN REVIEW: Full-out bear attack after June options date passes

In the event it didn’t happen. After weeks of speculation and conjecture around the London “street” the big June options declaration date came and went without excitement. That opened the door for the technical bear funds to go on the all-out attack on the light metal, emboldened by the general risk reduction programme that was washing over the LME markets from the direction of the US bond markets.

Sellers of those large open June call option positions would have had a nervous time last Monday. Most of the LME metals, led by copper, were rallying and 3-month aluminium had worked its way up to $2,826 at the day’s close—nicely poised, so it seemed, for a run up to the $2,900 level, where the first band of options lay.

However, it wasn’t to be. The likes of copper and zinc ran into profit-taking, lead was on the slide after Xstrata said it would lift the partial force majeure at its UK refinery and nickel was retreating on rising LME stocks.

Aluminium had a last collective look over its shoulder at those options and sank to $2,803 at Tuesday’s close. Any sense that the market was being double-bluffed had evaporated by the time Wednesday’s declaration came and went in what proved to be a massive non-event.

That removed from the market the delta-hedge buying by options shorts just in time for the risk reduction programme flowing out of the melt-down in the US bond market. Technical funds simply sold into the vacuum, breaks of the 100-day moving average around $2,785 and, more importantly, the 200-day moving average at $2,725 simply adding fuel to the technical fire.

The CTA systematic fund community, who form the rank-and-file of this technical army, piled on the pressure, our sources estimating it lifted its collective short exposure from around 25% of historic capacity at the start of the week to around 50% by Friday.

For LME 3-month aluminium it was four back-to-back days of retreat and by the Friday close at $2,690 the light metal had lost $98 on the week and was showing a 4.0% year-to-date decline.

If there were any bulls out there, they simply scurried for cover on the sound basis that standing in front of a freight train tends to be a dangerous business.
The super-bulls had already gone to ground. The LME’s compliance reports for last Thursday—the most recent, given the two days delay in publishing them—were completely devoid of dominant position holders.

That’s also clear to see in the market’s nearby structure, which relaxed further last week. Cash-to-3-months metal ended valued at $49.25 contango, out from $38.75 the previous week.

With the technical bears in full-out attack mode, it remains to be seen what level of support they will find at these lower price levels.

Last week’s collapse comes just ahead of the seasonal slowing in demand around the summer period and the jury is out as to how strong aluminium’s underlying dynamics are.

Demand in the European market still seems fairly robust and that in Asia OK, outside of China, where it is of course still rampant. But North America remains a key point of weakness and another set of poor shipments/new order figures out last week does nothing to suggest any imminent turnaround.

Institutional investor demand for far-forward aluminium remains seemingly insatiable, which, in tandem with weakening near-dated prices, last week helped further distort some of the forward spreads.

But no options play to focus minds and no “big brother” in the LME’s compliance reports suggest that 3-month aluminium will now have to find its own way for a while. At the moment, the bears are frolicking…will the bulls have an answer?