​​​​​​​Market Comments – April 27, 2017

NY futures pulled back this week, as July dropped 115 points to close at 77.96 cents.
Unable to keep the recent upside momentum going, July retreated to a 9-session low today in search of support from mill fixations. Short-term price action has once again turned negative, but the long-term uptrend remains in force for now, with the primary trendline running through around 75.50 at the moment.
After the close the CFTC on-call report showed that unfixed sales on July have actually gone up by 301,000 bales last week and amounted to 4.57 million bales as of last Friday. The situation didn’t improve this week, because open interest in July has been rising every session so far, which means that there couldn’t have been any meaningful long or short liquidation. July open interest in futures measured 13.7 million bales before today’s session, which is the highest amount ever for this date.
The same goes for December, where open interest climbed to 10.2 million bales this week, which too represents the highest amount ever for this early in new crop cycle. Like in July, a substantial part of this open interest is owed to unfixed on-call sales, which amounted to 2.84 million bales for December. 
Mills are obviously not discouraged by the negative experience of this season and continue to load up on on-call sales, which already amounted to 6.1 million bales as of last Friday. With much larger US and global crops expected in the coming season, mills may finally be on the right track. However, despite all these optimistic supply expectation we feel that December could turn into a difficult month, because the pipeline will be completely empty by the end of the 3rd quarter and price pressure may therefore be absent. 
US export sales finally slowed down last week, as offers were harder to come by. Nevertheless, there were still 194,200 running bales of Upland and Pima sold for both marketing years, with 18 markets participating. Shipments remained strong as 317,900 running bales went to 26 destinations. Total commitments for the season have now reached 14.25 million statistical bales, of which 10.2 million bales have already been exported. Sales for August onwards are at 2.3 million statistical bales, which is about twice as many bales as a year ago.
The commodity complex continues to display a weak appearance, with the broad GSCI index today at 380.38, which is near the yearly low set about a month ago. In April 2011 this index stood at 760.33, or nearly double of what it is today! Since then crude oil and most Ag commodities have been under pressure as commodities have turned into an out-of-favor asset class. 
Soft commodities like sugar, coffee and cocoa have been particularly hard hit in recent months on heavy spec liquidation and/or short selling. Although cotton has been bucking this commodity trend so far, it seems to be just a matter of time until specs pull the plug on cotton as well. The question is whether they will fade away quietly or whether they will go out with some fireworks in July?
The weakness in commodities is a bit surprising considering that financial markets have been quite upbeat lately, with the French elections and the Trump tax plan boosting investor confidence even further this week. The US tax plan, if passed, would provide a much-needed shot in the arm to the average US household and probably increase consumption for a while.
The flip side of this stimulus, along with the planned infrastructure spending, is that it would greatly increase an already large fiscal deficit. Since the early 90s there has been a strong correlation between the twin deficits (fiscal and trade) and the strength of the US dollar. The larger the deficits as a percentage of GDP, the weaker the dollar becomes, and vice versa. Since the deficits are expected to balloon over the next 12-24 months, we expect the greenback to weaken, which would be supportive for all things denominated in dollars. 
So where do we go from here? Near-term momentum has turned negative and this may force the market a little lower over the coming sessions. However, we expect heavy trade-short covering tied to mill fixations in the 76-77 cents area. At this point we’d expect the long-term trend-line near 76 cents to hold. 
The record open interest in July and the 4.5 million bales in unfixed on-call sales make the market vulnerable for spikes into the mid-80's. It all depends on whether specs will hold on to their longs or whether they cash in their chips over the coming weeks. We recommend using these corrections to get out of all remaining short positions in July. Use strength in March to establish bearish hedges with options!

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