This Is What Happens When A Short Squeeze Ends

Remember last week, when China was "fixed" because after the National People's Congress a record-smashing short-squeeze hyped on the back of stimulus hope sent Iron Ore prices soaring 20% in a day? Well that's all over...

Last week, analysts and traders alike were stunned by "the departure from fundamentals" as "the iron ore and steel markets have gone berserk."

As we noted last week, while at the annual National People’s Congress at the weekend, the authorities said they’d allow a record high deficit and higher money-supply target to support growth of 6.5 percent to 7 percent; they also vowed to help cut overcapacity in steel, potentially curbing demand for iron ore.

“We expect the current rally to be short-lived,” analysts Christian Lelong and Amber Cai said in a note predicting further growth in iron ore supply in the quarters ahead.

 

“The causality will revert sooner rather than later, and steel raw materials will one again drive steel prices rather than the other way around.”

Recent gains in iron ore probably won’t last, Goldman Sachs Group Inc. said in a report received on Monday, forecasting a drop back to $35 a ton in the final quarter. This year’s rally has been driven by rising steel prices in China, a reversal of the normal relationship seen between the raw material and the manufactured product, Goldman said.

Just as Goldman warned - the commodity rally was unsustainable..

With Iron Ore prices down 6 days in a row, the entire hope-strewn short-squeeze has been erased.