On the surface at least LME aluminium trading last week was a function of the same macro-economic spill effects from the melt-down in the US government bond market that rocked the other LME metals. However, as ever with this particular market, what happens below the surface is more interesting—and almost always more puzzling—than the oscillations at the front end of the curve.
Front…
Trading on the nearby months in aluminium remained a function of the large technical fund short position that has accumulated on the light metal in recent weeks.
After a day's respite on Monday, the sell-off in the US bond market resumed with full force on Tuesday with yields on the US Treasury's 10-Year note spiking briefly to 5.33% on Wednesday morning.
The tectonic change in US bond yields over the previous week had already translated into a risk-reduction programme by many bigger institutional players and it was probably no coincidence that all the LME metals—led by copper—experienced their point of maximum price weakness last week on Wednesday morning.
The metals complex had edged nervously higher during the eye of the US bond storm on Monday, in aluminium's case to the $2,740 level.
By the low point on Wednesday morning, it had sunk back to $2,660 with already bearish technical funds capitalising on the general financial markets havoc to press home their attack.
Our fund-watching sources estimate the CTA systematic fund community increased its collective short exposure to almost 60% of historic capacity—equivalent to a short position of 1.35 million tonnes--on Wednesday.
We suspect they would have continued piling on the pressure, particularly after the break of the 200-day moving average around $2,730, were it not for the fact that everything slammed into reverse on Wednesday afternoon.
The cause was again the US T-bill sector, where heavy-weight institutional investors were re-emerging as buyers after the apparent dramatic resolution of Greenspan's Conundrum—the medium-term inversion of bond yields to actual interest rates named after the former US Fed chairman who first drew attention to it.
That in turn triggered a dramatic turnaround in the LME metals with some big hitters emerging on the buy side and causing a short-covering stampede in the likes of copper and nickel in particular.
In the case of aluminium, the effect was less dramatic, although 3-month metal rebounded back to $2,750, where it closed on Friday. It was a week-to-week gain of $60 after five consecutive "down" weeks. That said, the nearby spreads remained in full contango, still reflecting the waves of lending activity that have characterised the light metal in the last couple of weeks. The full cash-to-3-months period ended up valued at $50 contango—hard to believe now that just a couple of months ago the period was consistently valued at more than $100 backwardation (late Jan-early Feb).
…And Back
But that, as they say, is only half the story. While the technical funds have been pushing the front end of the forward curve downwards, other funds have been aggressively buying the back end of the curve, a phenomenon that has been around for a while now but which continued last week, apparently undisturbed by events on the nearby months.
The result of this activity on the forward curve is represented in the chart above, which shows a snapshot on three days-- Mar 1, Jun 1 and last Friday –of LME prices from cash to 63 months forward.
Between Mar 1 and Jun 15 LME cash prices have fallen from $2,831 to $2,700. Over the same time-frame 63-month prices have increased from $1,960 to $2,214.
So forget Greenspan's Conundrum, it's the aluminium shape-shifting conundrum that is causing a collective scratching of heads around the London market-place. A similar shift of shape is also evident in the aluminium options volatility curve and as usual with the light metal, while some of
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