Market Comments – June 25, 2015

NY futures gained further ground this week, as December added 66 points to close at 65.38 cents.

It was an uneventful week, although December managed to post higher lows for five days in a row now. However, from a broader perspective December remains well within its 9-month trading range of 61-67 cents and for the last six weeks it has settled in an even tighter range of just 216 points, closing between 63.63 and 65.79 cents.

This week’s slightly stronger market seems to have come on the back of a short-covering rally in corn and soybeans, which have gained nearly 8% over the last nine sessions. Planting delays, continuous heavy rains in major US production areas and a large spec net short position have been fueling this rally in corn and soybeans. Although these two markets have been, and probably still are, among the most bearish commodities this season, this countertrend move serves a reminder of how quickly markets can change.

Unlike its counterparts cotton enjoyed fairly decent weather this week, with warmer temperatures and open skies. The latest crop condition index shows cotton at the second highest reading in the last ten seasons, which means that the acreage that got planted has great potential. The two best-rated seasons at harvest time were 2007/08 and 2010/11, which were both ‘wet years’. However, while this upcoming crop seems to hold a lot of promise, it is much later than normal and could therefore run into some trouble this fall, especially in regards to quality.

We believe that the uncertainty surrounding the US crop and the fact that there are hardly any US high grades left for sale were the reasons why the certified stock didn’t get traded this week. As of this morning the July contract had less than 30’000 bales still open, against a certified stock of around 180’000 bales, which means that there will be very few deliveries, if any at all.

This is somewhat surprising considering that a) there is no carry to December, b) the price doesn’t work to sell overseas and c) about 60% consists of staple 1.1/16 and shorter. This leads us to believe that this cotton was either never intended to be delivered, or that it has recently been sold, perhaps to US mills that needed a fill-in due to the late US crop.

US export sales continued at a steady pace, as 117’100 running bales of Upland and Pima were sold last week, of which 64’400 bales were for June/July shipment and 52’700 bales for August onwards. There were still 20 markets buying these bits and pieces of US cotton, with Vietnam once again taking the lion’s share. Shipment continued strong, with 206’200 running bales crossing the border last week, leaving just 1.4 million bales to be shipped with six weeks to go in the season. Total sales for the current marketing year now amount to 11.5 million statistical bales, while 2015/16 commitments have risen to 1.6 million statistical bales.

Although the physical cotton market has a bearish appearance at this point, with mills complaining about rising yarn inventories and Brazilian and Indian prices trending lower, we are now entering a 5-month period during which there won’t be any reconciliation between the futures and the physical market. With October having no open interest to speak of, the next notice period won’t arrive until late November. This will allow speculators to throw their weight around and as the past has shown there are times when money trumps fundamentals.

We therefore need to keep a keen eye on global money flows. Recently some prominent commentators and hedge fund managers have been warning about the risks of a deflating bond bubble. The global bond market is by far the biggest asset class today, amounting to over 100 trillion US dollars, and with yields near all-time lows, the risk of a mass exodus out of bonds seems to be increasing. What is disconcerting in this regard is that just twenty companies (Vanguard, PIMCO etc.) own around 70% of all marketable bonds! Therefore, if there is a flight out of bonds and these companies need to sell, who is going to be there to buy it from them?

We believe that it is just a matter of time until money starts leaving the bond market and once that happens, it will chase stocks, real estate and commodities instead. The size of the global bond market is so massive that even a small percentage amounts to trillions of dollars and therefore has the potential to lift other asset classes.

So where do we go from here? Next week’s USDA planted acreage report will likely determine the market’s next move. March planting intentions amounted to 9.55 million acres, but this number should drop as some acreage has either been prevented from getting planted or has been switched to other crops. Surprisingly a recent survey showed analysts’ expectations at an average of 9.35 million acres, or just slightly below the March intentions. Such a number would be bearish in our opinion, while a number with an eight in front of it would be considered friendly.

Beyond that the market is still in a long-term sideways trend, from which is may not escape anytime soon. We don’t anticipate a bearish move until the outcome of the US and other major crops is known, while a move to the upside would require some crop problems or an influx of speculative money.