PLEXUS Market Comments
Market Comments – July 30, 2020
NY futures rebounded this week, as December gained 126 points to close at 63.18 cents.
While today’s reversal from a low of 60.80 to a close of 63.18 cents was quite impressive, we have to wait and see whether it was short-covering or new buying that fuelled the rally. The December contract has dropped open interest for six consecutive sessions, declining from 121’423 contacts on July 21 to 114’228 contracts before today’s session. In other words, when the market broke through support last Friday, we saw a decline in open interest from long liquidation, while the ensuing rebound was a function of short-covering. It will therefore be interesting to see how the positions have changed today.
The CFTC spec/hedge report for the period of July 15-21 showed that speculators sold 0.10 million bales to reduce their net long to 2.44 million bales, while the trade sold 0.10 million bales as well and thereby increased its net short to 9.49 million bales. Index funds were the sole buyer, as they added 0.20 million bales to boost their net long to 7.06 million bales.
Index funds have bought around 1.7 million bales net since April 21 and were a significant contributor to the market’s rally over the last three months. While the trade and recently even speculators have turned sellers, index funds continue to see inflows into commodity baskets, which are seen as an inflation hedge by investors. We therefore expect the Index Fund long position to gradually increase over the coming months.
US export sales of 137,800 running bales for both marketing years were similar to those of the previous week, but what’s surprising is that basically all of these sales were for July or ‘prompt’ shipment. There seems to be a sense of urgency to get cotton delivered! Shipments remained quite strong at 328,600 running bales, although it seems that with just over a week of data left, US exports will fall slightly short of the 15.2 million bale estimate.
Total commitments for the current marketing year are now at 18.2 million statistical bales, of which a little over 14.6 million bales have so far been exported. The US export performance this season has been nothing short of stellar considering that we were dealing with a pandemic, as total sales are nearly half a million bales ahead of last year, while shipments are leading by about 0.4 million bales.
The Rio Grande Valley and the lower Coastal Bend of Texas got hit by Hurricane Hanna on July 25, which devastated any unpicked fields in the Valley and will likely cause some quality issues south of Corpus Christi. It is difficult to quantify the losses at this point, but we hear numbers in the vicinity of 150-200k bales. The hurricane season is definitely starting to ramp up, as tropical storm Isaias is the next system approaching the US. The current track has it moving along the East Coast, which could dump some rain on parts of the Georgia and the Carolinas. Conditions are favorable for development in the tropics at the moment and this will likely keep the market on its toes over the coming weeks.
The US dollar index continued to move lower, closing today below the 93 level, a drop of around 2 percent on the week, marking the lowest level since May 2018. Rising commodity prices are the inverse of a weakening US dollar, and this week gold hit a new all-time high, with gold futures briefly reaching $2000/ounce before pulling back a bit. Silver, copper, lumber and a number of other commodities have seen big spikes as well recently, as investors and traders are increasingly seeking exposure to the commodity complex. Even though cotton prices have rallied as well since April, we have yet to see new speculative long positions enter the market. So far it has been mainly spec short-covering and some index fund buying that provided the fuel.
While it is still anyone’s guess as to where the level of global mill use currently is, there has definitely been a pickup in activity in several markets. We feel that the unclogging of the supply chain will have to start with end-user demand for textiles and apparel. Consumers in most parts of the world are currently still unable to spend a lot of money on experiences (travel and entertainment), which combined with government stimulus has increased their savings rate to record levels. This in turn could set the stage for increased spending on low-cost discretionary items like clothing and home textiles. There is no good data yet to support this thesis, but we believe that consumers are going to open their purse strings as we head into the important holiday season.
So where do we go from here?
The market tried a move to the downside, with December breaking below its uptrend line and the 50-day moving average last Friday, but apart from some long-liquidation there was no follow-through selling to the downside. Then the market turned around and over the last four sessions managed to claw its way back above the trendline. Again, this was done by covering short positions rather than new buying, as the decline in open interest has shown, although we have yet to see what happened in today’s session.
Speculators have so far shown no appetite for either the long or short side of the market. Short sellers are an endangered species these days, as they are fearful of the Fed’s printing press. And while spec longs have been chasing a number of other commodities, they have shunned cotton so far. If this were to change and new spec buying comes in, it has the potential to lift the market several cents higher, especially with more money flowing into index funds as well. The trade, who is already 9.5 million bales net short, would probably not have enough ammunition left to oppose spec buying at this point.
The market held right at the 50-day moving average this morning and then rallied towards the 200-day, which at 63.52 presents the next resistance level. A move above the July 22 high of 63.46 and the 200-day MA would set up a move towards the July 7 high at 64.90 cents. Again, it all depends on how much speculators are willing to commit to the long side!