LONDON (Commodity Online): Positioning in the base metal markets has become increasingly bearish as gloomy expectations for the macro outlook are being expressed through short selling, said Barclays Capital in a research note.
Aluminium short selling, particularly by the CTA community, has driven LME open interest to a record high and it is still climbing. While this has weighed on front-end prices, consumer buying has countered some of this pressure and prevented prices from falling further.
The market has also been short zinc and while Barclays has advocated this position for some time, owing to zinc’s comparatively weaker fundamentals they believe that prices have now fallen to a point that makes the risk/reward of establishing fresh positions in this trade less attractive at this point.
In the nickel market, there has been shorting, which has lead to a spike in open interest to the highest since Q2 11. The short positioning in base metals is important because it provides an upside risk to prices and spreads. The potential for short covering, together with limited freely floating LME warrants due to financing deals (on zinc and aluminium), creates the risk through the end of the year of a tightening in the nearby spreads for these metals.
In the copper market, positioning has been light (though the market is slightly short) as investors have been put off by the opposing forces of a negative macro environment on the one hand, and positive fundamentals on the other. Furthermore, positioning in flat prices has been deterred by the volatility in daily price moves. Instead, investors have largely favoured to express views through time spreads or in the options market. This has caused the front-end copper put skew to rise and is now double ‘normal’ levels.
Across the base metals, positioning looks quite different from the run up to the 2008 financial crisis when the market was long and prices were high reflecting bullish sentiment. So when the macro environment soured, the first leg down in prices was driven by long liquidation. But the lack of long overhang in today’s market means that this is far less of a risk to prices. Indeed, the short positioning in base metals leaves prices vulnerable to rallies if these positions are covered or closed out should there be a reduction in macroeconomic risks.
