Aluminium trading was schizophrenic last week with the distinct impression that two different games were playing themselves out.
On the surface, trading in the light metal was a function of the receding risk-reduction storm that had broken over the world's financial markets the previous week and like the other metals, it benefited from the trickle-back of confidence that a full melt-down has been avoided…for now at least. But the other gam--the slow-motion squeeze that has gripped this market since the start of the year--also seems to be drawing to some sort of conclusion.
Returning Confidence
That risk-reduction storm was still in full force when trading started last week. Asian equity markets were still tumbling, the yen was still rising—aggressively so against currencies such as the Australian and New Zealand dollars—and both gold and oil were being pressured by fund sellers.
The waves were still breaking across the LME complex. Copper was pummeled lower from the off and three-month aluminium slumped from its Friday close at $2,748 to $2,674 in the morning session. Funds were still in full liquidation mode and CTA systematic players were emboldened to sell into the technical weakness with buy-side liquidity there somewhere but elusively so. There were some sharp gyrations over the afternoon session but the close at $2,678—a day-to-day loss of $70--looked a decidedly shaky one and London locals were still nervously scanning the horizon to see where the next bear wave would break.
Tuesday, though, other markets started to stabilize. The key Asian stock indices were staging tentative recoveries, as were gold—albeit after touching a six-week low in the morning—and oil. Trading was still highly jittery, the herd seemingly all too ready to stampede for the exit door again. It was a day of tentative recovery, aluminium making it back up through the $2,700 level before being panicked lower again to close at $2,694.
It was only on Wednesday and Thursday that confidence really started flowing back into the LME metals markets. Options declaration on Wednesday morning brought no major upsets with that big upside call option open interest now a long, long way away. Copper started forging back upwards and that helped aluminium get back to $2,745 at Thursday's close. But after the collective shocks of the previous few days, short-term profit-takers were always going to be out in force on Friday and the market ticked lower again for a weekly close at $2,718. That was still a week-to-week loss of $30 but nothing on the scale of the previous week's $137 loss and nothing compared to what London locals had feared it might be at the start of the week.
Returning Contango
More headline-grabbing than the movement in three-month prices was the return to contango of the full cash-to-3-months spread at Fridays' close. The period was valued at $4 contango—the first time it has not been in backwardation on a closing basis since early December.
Index fund rolls, which started last Thursday, helped the cause. April was the featured month with long positions being rolled forward from there, boosting lending liquidity.
But the structural games in this market also seem to be playing themselves out. From Monday onwards, the backwardation was confined to the two-week period leading up to the March prompt date (Mar 21) with all other components of the cash-to-3-months period valued consistently in contango.
As of Friday's close cash-to-Mar 21 was valued at $16 backwardation—in from $26 back the previous Friday—with Mar-Apr at $9.50 contango, Apr-May at $9.00 contango and May-3s at $1.50 contango.
In other words the spreads are becoming increasingly polarized around that Mar 21 prompt date. All sorts of fun and games are still taking place on the cash date. Monday and Tuesday saw huge volumes traded on and around cash. As always with this market, there are no doubt a few players in the know as to what hap
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