December left the board at around 78 cents, which we feel is in the vicinity of ‘fair value’ for SLM-style cotton today. Since there is such an abundance of SLMs this season, we believe that the NY futures market will be tied to the cash market until the inventory of these SLMs has been greatly reduced at some point in the future.
The abundance of lower US qualities and softer financial markets are keeping a lid on cotton at the moment. However, with crops around the globe not living up to their expectations, both in size and quality, there is currently not much price pressure building. We therefore see no reason for the market to leave its current range of roughly 77-82 cents, which it has occupied since mid-September.
From a fundamental point of view we see no reason for the market to rally. There is plenty of cotton around at the moment and the fact that we have such a large amount of tenderable 41 style cotton should keep a lid on the market. It would help if China were able to come back into the market to absorb some of these lower qualities, which is why traders are keenly awaiting the outcome of the US-China trade talks at the G-20 meeting this weekend.
There will be no market report this week due to national holiday in the U.S. Back next week.
When we look at the chart, we notice that March is pushing into a narrowing triangle, as defined by the primary downtrend line dating back to early June and by the cluster of early October lows. The boundaries of this triangle are currently at around 80.50 and 76.50. A break above or below these levels would likely trigger a reaction.
The market seems to be fairly priced here. Unless the global economy deteriorates, the recent lows at 75-76 cents are likely to hold. The question is whether the market can escape the 76-80 cents sideways trend to the upside? From a fundamental point of view we currently don’t see any justification for doing that.
The market made a nice move off the lows in heavy volume today, but we have seen these flash-in-the-pan rallies before. When we take a step back and look at the chart, we notice that December has settled the last 33 sessions in a fairly tight range of just 402 points, between 76.00 and 80.02. That dates all the way back to September 18.
It’s a tough call at the moment, because the cotton market is not really in charge, but relies to a large degree on what happens in the outside markets. Speculators have been selling over 9 million bales net since early June and they may not be done yet. They are probably down to a net long of around 2.5 million bales by now, but the last time we had the threat of a recession, in early 2016, speculators went to a 4.4 million bales net short position and the market traded in the mid-50s.
We feel like we are in a bull market with the hand brakes on. There are plenty of reasons to be friendly, but there is this fear that something bad is going to happen on the demand side. It is as if the market was telling us ‘never mind a couple of million bales less production, mill use is going to drop by a lot more than that’. Whether trade wars, emerging market problems and stock market jitters will indeed cut into the demand side remains to be seen, but we’d rather be long than short going into the December notice period at current prices.
While the US faces losses and quality problems in the Southeast, which accounts for about a quarter of US output, the global economy is confronted with an emerging market crisis, trade disputes and as of yesterday jittery stock markets. While both developments have the potential to move the market, we feel that fear of lower mill use in the wake of all these economic problems carries the greater weight at this point, especially when it comes to speculators, who seem to turn their backs on industrial commodities.
Although this listless market seems to suffer ‘death by a thousand cuts’, as speculators are leaving the game and the cash market feels anaemic, we believe that things are going to get a lot more lively as we head into the final weeks of the December contract.
It is important to point out that the recent weakness in the market was mainly caused by new spec short selling, after the market broke through the 200-day moving average. Although spec longs have been gradually reducing their long exposure since early June, there has been no panic selling on their part yet.
After we saw some weakness in fundamentals recently, the technical side followed suit this week by crashing through key support. For now it looks like this was just a necessary washout that realigned futures prices with reality. The fact that open interest held relatively steady, export business picked up and that there were still 15 million bales to fix as of last Friday gives us some confidence that the market has simply moved to a lower trading range of somewhere between 76-81 cents, rather than the beginning of a cascade in prices.
The market still seems to be trapped between strong support and resistance areas. With unfixed on-call sales still at 14.97 million bales as of last Friday, of which 3.71 were on December, there is still a strong layer of support underneath the market.
So where do we go from here? For now there is still plenty of support underpinning the market. The 14.95 million bales in unfixed on-call sales, the Indian MSP (Minimum Support Price) and the 200-day moving average at 80.00 cents act like a dam that holds the market back. However, these emerging market problems are like cracks appearing in this dam and only time will tell whether they can be repaired or whether there will eventually be a breach.
The market has very little momentum at this point and given the statistical situation this is not expected to change anytime soon, unless something were to drastically change in the supply/demand outlook. With crops about to come off the fields, supplies should be plentiful for a while and a potentially bullish scenario will probably have to wait until the 2019 planting season.
Markets don’t like uncertainty and at the moment there is plenty of it, which is why we believe that speculators will continue to reduce their net long holdings, while mills will continue to fix on a scale down basis.
From a technical point of view the market has broken through all kinds of important support levels this week, starting with the long-term uptrend line at around 8400 and then the July low of 8175. The last line in the sand is the 200-day moving average at just over 7900, which is often used as an important tool by long-term speculators. So far spec liquidation has been moderate, as open interest has only declined by about 10k to 261k, but the market needs to quickly prove itself if it wants to avert further damage.
Improved conditions in West Texas and the US/China trade standoff have weighed on the market this week, but the slightly higher open interest suggests that it wasn’t liquidation that forced prices lower. Instead it was probably an absence of buying that allowed the market drift south, as the 15.6 million in unfixed on-call sales (5.2 million in December alone) are still adopting a wait-and-see attitude.
Support looks quite solid in the mid-80s, as the US cotton pipeline will basically be empty by the time new crop arrives, mills have a massive amount of fixations to do, global stocks are decreasing, inflation is increasing, specs and index funds seem to have staying power and demand remains robust. It would therefore take a geopolitical or economic event to flip this market on its head.