Commodity index re-weighting to benefit metals, Aluminium, nickel, zinc seen gaining mainly
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Base metals are about to get a major boost from the annual rebalancing of some of the major commodity indices, which kicks off in next week.
Aluminium, in particular, is expected to see an estimated 16,000 lots or 400,000 tonnes purchased on the London Metal Exchange (LME), along with up to 3,000 lots or 18,000 tonnes of nickel and 12,000 lots or 3,00,000 tonnes of zinc, traders said.
ARBITRAGE-LED ACTIVITY
The Comex division of the New York Mercantile Exchange is, meanwhile, expected to see activity in copper-with between 5,000 and 6,000 lots to be bought – which is in turn expected to trigger some arbitrage led activity on the LME. Comex copper contracts are worth 25,000 pounds, or 11.33 tonnes, each.
This calculation is based primarily on the re-weighting of the Dow Jones AIG Commodity Index, or DJAIGCI, which takes place each year in January on the price-percentage basis. The re-weighting takes place between the fifth and ninth trading day of the year, which means it will begin on Tuesday and end on January 14. Other indices to be re-weighted include the Reuters/Jefferies CRB Index and the Rogers International Commodity Index, traders said.
Rebalancing and re-weighting generally means an index may reallocate out of commodities that have appreciated in value and into commodities that have underperformed.
MOVING HIGHER
Already this week, base metals have started to move higher, with aluminium up 4.5 per cent from the start of year lows, nickel up 15 per cent and zinc up 9 per cent.
Traders said this was the result of market participants “getting in early” due to the anticipation of higher prices during the re-weightings this week. Short covering is also emerging, with speculative players in particular looking to cover or at least reduce positions before the weightings lifts prices, traders said. “Whether this move will be used as a glorious sell opportunity to start off the year of the start of a recovery in the sector remains to be seen,” a London trader noted.
$42B INVESTMENT
The DJAIGCI is by far the biggest of the indices to be reweighted, with an estimated $42 billion invested in financial products.
It is based on 19 physical commodities and determines its component weightings by liquidity.
Under DJIGCI rules, no single commodity can comprise less than 2 per cent or more than 15 per cent of the index, and no related group of commodities can represent more than 33 per cent.
The biggest commodity index in terms of value is the Standard & Poors Goldman Sachs Commodities Index, which has around $90 billion invested in its 24 commodities.
This index is reweighted by tonnage rather than value, making the change insignificant to trading patterns.
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Source : Business Line |
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