PLEXUS Market Comments
Market Comments – July 23, 2020
NY futures continued to slide this week, as December gave up 62 points to close at 61.92 cents.
The summer doldrums continued, as participation was extremely low, with average daily volume amounting to just around 13k futures contracts over the last five sessions. There is no momentum on either side, as the market finds itself stuck between the 50-and 200-day moving averages, which have both started to flatline.
The CFTC spec/hedge report for the period of July 8-14 (during which December first rallied to 64.90 and then came off to 62.63) showed that speculators and index funds were once again the driving force. Speculators bought 0.52 million bales net to bring their net long to 2.54 million bales, while index funds added 0.17 million bales to increase their net long to 6.85 million bales.
The trade continued to increase its net short position, adding 0.70 million bales to boost its total net short to 9.39 million bales. That’s the trade’s largest position since February 18.
This time it was a combination of new spec buying and spec short-covering that powered the move. However, as previously stated, it has been mainly spec short-covering that did the heavy lifting from 55-65 cents. Large spec shorts (hedge funds and CTAs) have covered 3.2 million bales since April 21, while large spec longs added just 0.45 million bales (almost all of them during July 8-14). Index funds did their part as well, as they bought 1.51 million bales net since April 21.
Large spec shorts had only about 1.54 million bales left to cover and it is unlikely that all of them will get out. Large spec longs owned 3.75 bales on July 8, but some of them have probably gotten out during this 300-point pullback.
Index funds might continue to see inflows, as investors put more money into commodity baskets as an inflation hedge, because central banks and governments are churning out trillions of dollars to shore up the global economy. Cotton gets a share of every dollar that goes into these commodity baskets.
However, for the market to regain its upside momentum we would need to see new spec buying, which could of course happen, but speculators need a good reason to do so. Remember, they didn’t buy the market during the 10-cent move from 55-65 cents, so why would they do so now?
Maybe the strongest argument for new spec longs to come in is a weakening US dollar. While we were bullish on the US dollar earlier this year, there have been some fundamental changes that argue for a weaker greenback. For one, the US has printed the most money among economies in recent months and will continue to do so, as its annual fiscal deficit is exploding to 20-25% of GDP.
The second strike against the dollar is the narrowing interest rate differential. For example, the spread between the US 10-year Treasury and the German 10-year Bund has dropped from 273 basis points in November 2018 to just 109 basis points this week. We have seen similar developments against other sovereign bonds.
Then there is the political angle, as the recent riots and all the uncertainty surrounding the upcoming elections are prompting foreign investors to take some money off the table.
On the bearish side we had weak US export sales and improving weather conditions in West Texas that have put some pressure on the market. US export sales amounted to just 31,600 running bales net for all three marketing years combined, while shipments of 273,600 RB remained relatively strong. For the current marketing year we now have commitments of 18.05 million statistical bales, whereof 14.3 million bales have so far been exported.
West Texas has received some scattered rain this week, but more importantly there is a shift in the general weather pattern. The two-week forecast calls for cooler temperatures and increasing moisture, stemming both from the Southwest monsoon and tropical activity in the Gulf of Mexico. Models are predicting above normal precipitation for West Texas, which would improve crop conditions.
So where do we go from here?
The primary uptrend line, which had its origin in early April, has once again caught up to the market. So far the December contract has been able to hold trendline support when it was tested before, and we wonder whether it can again generate some escape velocity this time around.
A break below the primary trendline at around 61.80 and then the 50-day moving average at 60.33 would change the technical picture and possibly spark some spec selling, or at least stop any spec buying.
The fundamental picture continues to look bearish, as mills are well covered and most origins need to dispose of inventories before new crop arrives. Add to this the slowing economic recovery due to a flare up in virus infections!
We therefore remain cautiously bearish, but are well aware of the fact that massive money printing and a weaker dollar may continue to act as countervailing forces.