Market Comments – January 15, 2015

NY futures were on the defensive this week, as March fell 107 points to close at 59.49 cents.

March traded to its lowest level since November 24 yesterday, getting to within 13 points of its 58.53 cents contract low, as negative vibes from outside markets overshadowed otherwise fairly constructive developments on the cotton front.

Speculative selling into scale down trade buying seemed to once again be the main feature this week. This was already the case during the week of December 31 to January 6, according to the latest CFTC report, as speculators sold 8’137 contracts net, while index funds reduced their net long by 1’342 contracts. The trade was the lone buyer, acquiring 9’479 contracts.

Overall speculators moved back to the short side with a 0.7 million bales net short as of January 6, while the trade carried a 4.1 million bales net short position of its own. Index funds had their lowest net long position in exactly three years at just 4.8 million bales, which is a bit surprising considering that there should have been some preemptive buying ahead of this week’s rebalancing. Maybe recent index fund redemptions more than offset any rebalancing efforts.

Spec selling and fund redemptions may be tied to a ‘risk off’ move by investors, as fears of another financial storm have been growing in recent weeks. It is still unclear how many victims the precipitous drop in crude oil has claimed, but there are plenty of rumors about financial institutions and hedge funds facing large losses and/or defaults.

There were a number of other events that gave traders pause, such as the big drop in copper prices, cracks appearing in the US stock market, the fact that 5-year government bonds in Japan, Germany and Switzerland are either at zero or negative interest rates and to top it all off we had today’s wild move in the Swiss Franc. With all these dislocations it is no wonder that many traders prefer a move to the sidelines, waiting for the fog to clear.

US retail sales for December, which put a damper on the cotton market on Wednesday, were reported at a negative 0.9%. They got a lot of press this week and seemed to cast another shadow over already nervous financial markets. However, when we dig deeper into the numbers of the Census Bureau, we actually find them to be a lot more upbeat than the headlines may suggest.

To be more precise, the “not seasonally adjusted” number was the highest ever at USD 505.3 billion. Only after the government applied an adjustment factor to account for “seasonal variations, holiday and trading-day differences” did the number get knocked down by a whopping USD 62.3 billion to a “seasonally adjusted” USD 442.9 billion, which is the one that gets reported. To us the untampered number suggests that the US consumer was still alive and well in December and thanks to much cheaper gas prices we don’t expect that to change anytime soon.

Monday’s USDA supply/demand report contained only minor changes that did not alter the ROW position by much. The ROW production surplus is now at 13.43 million bales (vs. 13.38 million in December), while ROW ending stocks increased slightly to 45.48 million bales (vs. 45.42 million in Dec). The biggest change occurred in China, where mill use was lowered by 500’000 bales, contributing to a global drop in mill consumption of 365’000 bales last month. In its last two reports the USDA has cut mill use by 1.6 million bales, which we feel is a bit too pessimistic.

The bright spot this week was today’s US export sales report, which came in at an unexpectedly high 449’100 running bales of Upland and Pima cotton. China and Vietnam accounted for a combined 315’100 bales and it was nice to see Turkey back in the mix with 54’000 bales. There were a total of 17 markets participating, which emphasizes the strength of this report.

Shipments picked up their pace as well, with a marketing year high of 234’800 running bales leaving the country. Total commitments now amount to 8.4 million statistical bales (84% of the USDA export estimate), whereof 2.8 million bales have so far been shipped.

While export and domestic commitments have already reached 12.2 million statistical bales at this point, total free supplies still continue to lag behind. So far around 8.5 million statistical bales have been freed from the loan, which combined with the 2.5 million bales in beginning stocks brings availability to 11.0 million statistical bales. With the AWP still trending lower (46.77 next week versus 47.13 cents), US cotton will continue to play hard to get in the foreseeable future.

So where do we go from here? When we look at the cotton market in isolation, there should be plenty of support based on the fact that US basis levels remain unusually strong, export demand appears healthy, remaining supplies are dwindling fast and planted acreage is going to drop. However, as we have seen in 2008, cotton cannot shield itself from upheaval in the financial markets and recent developments have heightened the risk for black swan events. While there is still reason to be cautiously optimistic, one needs to keep looking over his shoulder and it probably wouldn’t hurt to buy some insurance in the options market. Just ask any crude oil or Swiss Franc trader!