Market Comments – October 3, 2019

NY futures spiked higher this week, as December gained 132 points to close at 61.60 cents/lb.

After December had closed ten straight sessions in a very tight band of just 70 points, between 60.28 and 60.98 cents, it started to move higher on Wednesday after the 20-day moving average crossed over the 50-day, triggering a buy signal.

The market had already shown that it wasn’t ready to drop below 60 cents anytime soon, since it bounced back with conviction from every attempt to sell off. Just over the previous four sessions December managed to close between 75 and 132 points above its daily low.

The rounding bottom that had formed over the last three weeks, combined with the moving average crossover, set the stage for today’s rally, which saw December spike to a high of 62.91 cents on spec short-covering and possibly some new buying.

However, like in its previous attempt on September 13, during which December topped out at 63.39 cents, a wall of trade selling stopped the market in its tracks and forced it to retreat. By the end of the session almost all of the 158-point intraday gain had melted away and December settled just marginally higher.

From a fundamental point of view the situation is still quite bearish. Unless there are some last-minute setbacks during harvest, global supply will be more than adequate to meet mill use, which seems to be struggling as the global economy is slowing down.

Global manufacturing continued to slow markedly in September, with the Purchasing Managers Index (PMI) in the US and Germany falling to a 10-year low. The Eurozone, Japan and China are also experiencing contractions, and this will likely lead to a drop in consumer confidence and spending. The tariff war between the US and China may have contributed to the decline, but we believe that the global economy was slowing anyway after enjoying a decade of expansion.

However, while in the past the threat of recession would have invariably led to a drop in asset prices, we nowadays have central bankers standing by with cheap money and as buyers of last resort. We therefore feel that stagflation becomes more and more likely. In this scenario we could see the world economy go into recession, yet nominal asset prices would rise nonetheless due to relentless money printing.

Central bankers already own an estimated USD 1.2 trillion in equities around the globe, which may not seem like much in a USD 77.0 trillion global equity market. But there is no telling how much more money they are going to print in order to support equities, bonds and possibly real estate. Traders know that they have the Fed and other central banks backing them and for this reason we expect financial markets to remain on a firm footing over the longer term.

Commodities are more difficult to assess, because they are caught between bearish (recession) and bullish (inflation) forces, but ultimately the wave of money that is coming at us is going to lift all the boats, at least in nominal terms. Even though this paradigm shift towards an inflationary environment will likely take several years to unfold, it becomes increasingly more dangerous to approach asset markets from the short side in our opinion.

US export sales were about as expected at 189,100 running bales of Upland and Pima cotton for both marketing years. Buying was broad-based with 16 markets participating. Shipments continued to lag at just 167,200 running bales. For the current season we now have 9.2 million statistical bales on the books, of which just 1.9 million bales have so far been exported.

When we look at the US balance sheet, we expect total supply to be at around 27 million bales, of which only 1.9 million bales have been exported and around 0.6 million bales have been used by domestic mills. In other words, only 2.5 million bales have disappeared so far, leaving 24.5 million bales yet to be shipped and spun into yarn.

The other two exporters, India with a supply of 39.5 million bales and Brazil with 24.0 million bales, are in a similar situation. It may still take a while until the full weight of these supplies is felt, but in a couple of months from now it will definitely be a buyer’s market.

So where do we go from here? The market just experienced its second technically induced short-covering rally by the specs, which ran into heavy trade selling once values moved above 62 cents. Support and resistance levels exist because the market has ‘memory’. Commercials who have missed their chance to place short hedges near 63 cents will likely become more aggressive the next time around, which should solidify resistance.

At the same time the trade is not willing to chase values below 60 cents at this point, while specs are becoming more wary after the recent spikes and will abstain from adding more shorts. We expect speculators to turn into net buyers going forward, which should facilitate the handover of net shorts from specs to the trade. This will likely take place in a 60-64 cents window.

Once the crops have moved in and the current bottleneck is resolved, we believe that the weight of supplies around the globe will start to weigh on values. It will probably be a slow grind lower, but we are not convinced that the lows of the season are in. A lot will of course depend on how the global economy looks like in a few months from now. A US/China trade deal and renewed economic optimism could potentially alter the scenario in favor of the bulls.  

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