NY futures retreated this week, as May gave back 159 points to close at 83.53 cents.
The market cooled off this week, as there was no additional spec buying, while mills were waiting for a deeper correction to square away their May and July fixations. The lack of buying has allowed the market to drift lower, with May trading as low as 82.04 cents earlier in the week, before fixation buying started to chase values higher again.
When we look at the market simply from a cotton perspective, the news continues to be very supportive, as US export sales and shipments were once again excellent, while mills have still not made any progress in getting out of their May and July fixations.
US export sales of Upland and Pima were once again stellar at 528,000 running bales for both marketing years combined. Participation remained broad-based with 20 markets buying, while shipments of 439,900 running bales went to 23 destinations. For the current season we now have commitments of 14.8 million statistical bales, of which 7.2 million bales have so far been exported. New crop sales have already reached 2.7 million statistical bales, which is nearly twice as many as a year ago.
Unfixed on-call sales haven’t made any progress, as there were still 7.93 million bales open in current crop as of last Friday, of which 3.20 million bales were on May and 4.73 million on July. Since open interest in May and July has hardly gone down during this recent dip in the market, we assume that there are still about 7.5 million left to fix at this point, with just 14 weeks to go before July heads into its notice period!
The CFTC spec/hedge report showed that as of March 6 speculators had increased their net long by another 0.99 million bales to 9.24 million bales net. That was still well below the 12.05 million bales they owned on January 23, which means that specs would still have room to grow their net long position.
However, the threat of an escalating trade war has cast a shadow over commodity markets this week, which might affect the behavior of spec longs going forward. Markets don’t like uncertainty and at the moment we have plenty of it, by not knowing whether the Trump administration is just bluffing or whether they will actually follow through on their tough stance on trade.
So far only tariffs on steel and aluminum have been imposed, which are relatively insignificant in a global context. But now the US seems to be targeting China directly, with potential tariffs on a wide array of Chinese imports, including apparel.
The Trump administration may feel that it operates from a position of strength, because North America as a whole (US and Canada) has become self-sufficient in food and energy, and also has the ability to manufacture more or less everything its citizenry needs, albeit at a much higher cost. Europe and Asia on the other hand still have to import a large percentage of their food and/or energy needs, and a much larger percentage of their GDP depends on exports.
However, a trade war would be bad for everyone involved, since it would almost certainly lead to a global recession and wreak havoc in the financial markets.
So where do we go from here? The situation hasn’t changed much from last week. We still have a massive on-call position that needs to be fixed, which provides a solid layer of support underneath the market. Most of the buy orders by mills seem to be placed between 80.00 and 82.50.
Speculators seem to have taken a wait-and-see attitude, pending further developments on the trade front. If the situation escalates, specs will likely reduce their net long, which would allow mills to fix at lower levels. But if specs were to simply sit on their hands and more or less maintain their current position, it would cause a problem for trade shorts due to a lack of sell-side liquidity.
For now we see the market in a sideways range, as it is well supported by trade fixations, yet capped by uncertainty.
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