MI WEEK IN REVIEW: Is nickel now suffering from “vertical...

MI WEEK IN REVIEW: Is nickel now suffering from “vertical fatigue”?


Metals Insider - 12 February 2007



MI WEEK IN REVIEW: That was the questioned posed by a local LME commentator early last week and it captures a general sense that nickel has lost its upwards momentum. That, of course, can be a very dangerous thing in these markets, since momentum is a key driver of the CTA systematic fund community's trading patterns.



Shuffle to the Exit

Nickel has gone its own way for some time now, ignoring the generally weaker tone in most of the other LME metals that has been evident since the start of January. Still dangerously low LME stock levels, resulting extreme backwardation and the presence of trade shorts have combined to keep it poised at historically high levels.



However, after getting within touching distance of the $40,000t level in late January, 3-month LME metal has traded sideways with a downwards bias. That downward bias came into clearer focus last Monday when the market fell from an early (weekly) high of $38,050 to $35,695 at the close—a day-to-day loss of $1,705.



It was capped at $36,500 over the rest of the week, although the Thursday lows around $34,500 held comfortably, pre-empting the Friday close at $36,150. That was a weekly loss of $1,250 and the second one in succession.



A near 2,000-lot decline in open interest from Tuesday onwards reinforced the sense that some of nickel's fans among the technical community have decided to take their profits. It wasn't exactly a rush for the door, more a polite shuffle. Our fund-watching friends estimate the CTA systematic community lightened its long exposure last week from around 70% of historic capacity to somewhere closer to 50%.



Nothing has yet happened on the charts for this thinning of the room to become a stampede to get out. But there are growing concerns about the potential for a brutal sell-off, particularly given generally thin volumes and the absence of many bigger speculative players who missed the latest up leg and are now out of the market awaiting a better (much lower) entry point. Trade shorts are largely providing the buy-side liquidity but they could easily back off if the fund selling picks up momentum.



Stabilising Stocks

Another area of potential weakness is the nearby backwardation structure. The benchmark cash-to-3-months period ended last week valued at $2,260 backwardation, compared with $3,175 the previous week.



To some extent this may reflect just the monthly rolls by the big index funds. The movement of shorter-dated positions to longer-dated positions tends to boost lending liquidity and weaken the spread structure. But we also note a lessening in the backwardation on the tom/next spread, which is the best indicator of cash tightness. From a quoted $100-150 on Monday morning it eased steadily last week to $10-20 this morning, albeit with the usual intraday volatility.



That seems to be a response to developments on the LME stocks, which actually rose last week for the first time since the first days of January. As we note below in our usual stocks commentary, it may be too early to suggest that nickel stocks are about to turn the corner, but at least the downwards pressure seems to have alleviated for now, even if this may simply be a function of the fact there is no tonnage left to cancel in Europe, an area of maximum physical tightness.



All of this is of course still highly relative, i.e. LME inventories are still extremely low and the price is extremely high. But there doesn't appear to be any fresh buying coming in at these levels and it will probably only do so once nickel comes back quite a bit further. In the interim, nervous locals are left wondering whether the exit of CTA funds will start accelerating.



“We think nickel could just as easily trade at $30,000 as it could at $40,000 this week,” was one London local's assessment of the market last week. $30,000 is still a high price and representative of an extremely tight market, but it's one that is over $6,000 below Friday's close. Keep an eye on that exit door!



Weekly Metals Analysis



12 th February 2007