PLEXUS Market Comments
Market Comments – May 07, 2020
NY futures pulled back this week, as July dropped 194 points to close at 55.39 cents.
The market had a roller-coaster week, with spot futures first dropping more than 400 points in three days and then recovering half of it over the following two sessions. This reflects the tug of war between a dismal economic reality and a potential squeeze play on tenderable grades in the July contract.
China has been quite active in the US market recently, with the US export sales report revealing that another 239,600 running bales were booked by China last week, bringing the two-week total to 777,000 RB. It is still anyone’s guess as to how much China will ultimately take in the current buying spree, but estimates are as high as four million bales.
Apart from China there were also 189,000 RB sold to 14 other markets, which brought the weekly total to an impressive 428,600 RB for both marketing years. Shipments were surprisingly strong at 373,500 RB, which was 70k bales above the level needed to make the current US export estimate of 15.0 million statistical bales. Despite a frozen supply chain, the US has somehow managed to maintain a high pace of shipments.
For the current season we now have total export commitments of 16.9 million statistical bales, of which 11.0 million bales have been shipped. New crop sales are so far at 2.55 million statistical bales.
Chinatex, who seems to be the main buyer, has apparently been mopping up tenderable qualities trough several merchants and this could turn July into a dangerous bet for short sellers. It was already strange that the May contract remained inverted and last traded at 57.83 cents, with no one willing to deliver cotton against it, and we could see the same happening again six weeks from now when July enters its notice period.
In other words, while there is an abundance of cotton inventories around the globe, there may actually be a tight supply of tenderable grades if the Chinatex rumours prove to be true. This would mean that instead of large ending stocks forcing carrying charges on the board, we might see a lack of carry or even an inverted market.
For this reason we feel that traders should avoid the July contract altogether or use options only to trade it. Although December may be influenced by what happens with the July contract over the next six weeks, it is going to be a truer reflection of reality, because China won’t be able to corner the entire tenderable supply of next year’s crop.
The latest available CFTC report, which reflects futures and ‘delta-ed’ options positions as of April 28, showed that speculators bought 0.30 million bales to reduce their net short to 0.97 million bales. Index funds were also net buyers, adding 0.07 million bales to increase their net long to 5.41 million bales. The trade on the other hand sold 0.37 million bales, thereby increasing its net short to 4.44 million bales.
By looking at financial markets one would never suspect that we are in the middle of an economic depression. Stock markets are once again in a mindset of ‘bad news is good news’, because bad news ensures continued low or even negative interest rates and unlimited money printing, possibly for years to come.
There is also the mistaken belief that economies will quickly snap back once the global lockdown ends. That’s why traders shrug off jobless claims of 33.5 million over a seven-week period. While there will definitely be a rebound once restrictions are lifted, it is naive to believe that we will go back to where we were. Many of these jobs will not come back and unemployment will likely remain in the high single digits.
We believe that we have merely reached the ‘Denial’ phase in the economic ‘Fear and Greed’ cycle, with Fear, Despair and Discouragement yet to come. This depression is not a sprint, but a marathon that is still going to cause a lot of suffering as we head down the road.
For some clothing retailers the end is already here. This week J.Crew and Neiman Marcus filed for bankruptcy, Lord & Taylor is closing its stores, while JC Penney and Land’s End are rumored to be next. These closings will cause even more disruptions along an already battered supply chain.
So where do we go from here?
China buying has provided some excitement in recent weeks and rallied the market into the mid-to-high 50s. A lack of tenderable supplies might keep the July contract elevated, but once December takes over as the lead month, the market will have to face reality again.
This reality sees ROW ending stocks of around 60 million bales by the end of July, or some 15 million bales more than a year ago. And the coming season might add another 6-10 million bales to this burdensome inventory.
Next Tuesday the USDA will give us its first detailed look at the 2021/21-season and while the government may tread carefully with its initial estimate, we can’t imagine that it will be a pretty picture.
Sooner or later all this excess cotton around the globe will start to compete for a home, which we expect to drive prices lower. And it could get outright ugly if the high expectations for an economic rebound don’t pan out. We still believe that the market will eventually trade to a new low, maybe not this marketing year, but probably at some point during the 2020/21-season.