LME COTR - Money managers cautious despite bright start to 2017

Net impact: Bearish

Comment: The money managers' net long position dropped 2,101 lots in the week ending January 13, which saw the downward path in the net long position resume after just one week of uptick - the 7,351 lots of long liquidation were partly offset by the covering of 5,250 lots of shorts.

During the period covered by the data, three-month prices climbed to $5,917 per tonne from $5,600 per tonne. So it is surprising that fresh buying was not seen, although the short-covering helps explain the rally.

The net long money managers' position remains elevated at 66,837 lots (see shaded area on the chart). The reason for the net position holding up so well is the degree of short-covering - the gross short position is the lowest we have on record.

The low level of gross short positions suggests the market is not overly bearish. We were waiting to see if the gross short position picked up because that could have triggered a bearish head-and-shoulder pattern on the three-month price chart. But with prices heading higher again this year, the H&S pattern looks less likely to be triggered.

The funds were not the buyers last week; perhaps it was consumer restocking to take advantage of the December sell-off.

Net impact: Getting more polarised

Comment: The run of long liquidation halted - money managers bought 22,213 lots in the week ending January 13- but the shorts also added 14,753 lots so the market is becoming more polarised. 

Prices have been rallying robustly and setting fresh highs so the shorts that have been building positions may ultimately have to cover, which could add to the buying pressure. Alternatively, if the shorts are determined, their current relatively small position could still increase significantly - compare the red and green lines are on the chart with previous highs.

Comment: The net long money managers' position dropped 448 lots - fresh selling (1,951 lots) outpaced fresh buying (1,503 lots). The net long money managers' position has fallen in nine of the past eleven weeks but it is still relatively high.

Given the change to Indonesia's export rules governing nickel ores, we are surprised money manager longs did not take profits.

The cloudier fundamental outlook with regards to Indonesia may well prompt more stale long liquidation.

Still, the market is still waiting for information from the Philippines as to whether it will rein in production to a greater extent.

All in all, the market has an opportunity to sell off but so far it does not seem to be taking it.

Comment: The seven-week drop in the money managers' net long position ended two weeks ago - the net position climbed last week but only because short-covering outpaced long liquidation.

The continuing drop in money managers' interest is strange given the strength of the market; perhaps the funds do not like lead's volatility.

The short position had been falling for most of 2016, a process that has resumed in 2017 - the gross short position is now the lowest we have on record.

The relatively low level of gross long and short positions means a return of fund interest could become an important driver of prices.

Comment: Although the net long money managers' position dropped 1,172 lots last week, the position has not changed that much in recent quarters, as as the shaded area on the chart shows.

Longs cut 2,373 lots and shorts cut 1,201 lots. The lack of volatility and the downward slopes on the red and green lines suggest money managers have not been that engaged with zinc.

As with lead, this suggests other parties are driving zinc prices.

Comment: Money manager longs and shorts reduced their exposure last week.

The downward-sloping green and red lines suggest funds are reducing their exposure - the sideways price trend is no doubt making it dangerous to just be sitting in the market waiting for direction.