NY futures trended lower this week, as December dropped 169 points to close at 68.07 cents.
After reaching a high of 71.09 last Friday the market ran out of steam as mills stopped chasing values higher and producer selling became more active. Since then the market has backed off to the 68 cents level, where mill fixations have once again started to show up.
Since September 1st the market has meandered in a fairly tight closing range of just 473 points, between 66.98 and 71.71 cents, boxed in between mill buying at the bottom end and grower selling at the top of the range. It is therefore not surprising that we have seen a pronounced drop in volatility, from mid-20% readings in late August to around 19-20% at the current time.
Low volatility readings are telling us that the market doesn’t fear any big moves and is starting to settle in for a boring sideways trend. However, we get the feeling that this could be one of those ‘calm before the storm’ periods during which traders are often getting a bit too complacent. Early 2008 and summer 2010 come to mind, when the traders didn’t expect the market to do much either.
What makes us a bit uneasy at the moment is that we head into an action-packed week with this very high open interest of 25.5 million bales. Next week we have US elections on Tuesday, the WASDE report on Wednesday, options expiration on Friday and the Goldman roll from Monday to Friday. This should wake the market up from its slumber!
With Trump gaining ground on Clinton as we head into the elections, financial markets are getting increasingly nervous. A Trump win would be been seen as ‘a great uncertainty’ by the markets and likely trigger a negative reaction, while a Clinton win might be more reassuring to Wall Street. While volatility in the stock market has risen ahead of this event, we are a bit surprised that the cotton market has so far shown no reaction.
With speculators holding a rather large net long position of 8.5 million bales (as of October 25), a “risk off” move could trigger an avalanche of selling, similar to what we saw at the beginning of this year when the US stock market dropped nearly twenty percent and speculators went net short in the cotton market.
The WASDE report should show a larger US as well as global production number and therefore come in on the bearish side. We keep hearing of above average yields in the Mid-South and around Lubbock, which isn’t congruent with the current USDA estimate that has yields some 30 pounds below their ten-year average. We also need to watch out for reductions of beginning stocks in India, Pakistan and China, although the USDA may take its time with these revisions, which would have bullish implications.
US export sales for the week that ended on October 27 were slightly disappointing at 168,600 running bales for both crop years combined. Nevertheless there were still 19 markets buying and 23 destinations receiving shipments of 134,600 running bales. For the season we now have total commitments at 6.4 million statistical bales, of which 2.3 million have so far been exported.
Unfixed on-call sales continued to increase by 151,300 bales net last week and amounted to 8.71 million bales as of October 28. Although December on-call sales saw a slight reduction, there were still 1.97 million bales open with only about two weeks to go. March on-calls will be next in line with 2.81 million bales open.
So where do we go from here? While from a fundamental point of view a continuation of the 67-72 cents trading range still makes sense for all the reasons we have already discussed, macro events could exert their influence on cotton over the next week or two. We therefore believe that it makes sense to take some risk off the table and adopt a wait and see attitude next week.
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