PLEXUS Market Comments
Posted : December 06, 2022

PLEXUS Market Comments

MARKET COMMENTS – November 18, 2021


NY futures ended the week little changed, as March dropped just 27 points to close at 115.14 cents. The Dec/March inversion narrowed 313 to 245 points. 

The market continued to move sideways, with the March contract closing the last 14 session in a relatively narrow 401-point settlement range, between 112.91 and 116.92 cents. 

Even though there are currently just 194 bales left in the certified stock, the December liquidation has been orderly so far, with only 9.9k contracts remaining before today’s session, which saw 6.5k contracts traded. There are still two more sessions before Tuesday’s First Notice Day, which should allow to clear out most of the remaining positions. 

Just when the market started to look a little tired, a rumor that India might consider export restrictions shook traders up yesterday and we briefly rallied out of a flag formation on new spec buying and trade short-covering. However, the market quickly calmed down again once it became clear that the Indian government would hold off for now, expecting the market to retreat on its own. 

While export restrictions may not be necessary, we have long held the belief that India’s statistical situation is tighter than the WASDE projects, as beginning stocks of nearly 14 million statistical bales (17.84 million local bales) are still too high and exports of 5.8 million statistical bales (7.4 million local bales) seem too optimistic, possibly by as much as 1.5 to 2.0 million bales. 

US exports came in at that lower end of expectations, as 164,500 running bales of Upland and Pima were sold for both marketing years. Interest was broad based with 21 markets participating, while shipments of 84,400 running bales went to 22 destinations. 

Commitments for the current season are now at 9.3 million statistical bales, of which just 2.4 million bales have so far been exported. These numbers compare to 10.0 million in commitments and 4.1 million bales in shipments a year ago. 

In order to make the current export estimate of 15.5 million statistical bales, we would have to ship around  342k running bales per week for the remainder of the season! This sounds like a tall order given the current supply chain issues. 

The CFTC on-call report showed that as of last Friday, November 12, there were still 16.10 million bales in on-call sales open, compared to 4.34 million in on-call purchases. March has the largest amount, with 6.35 million bales in sales and 1.11 million in purchases yet to be fixed. This is a strong element of support, although mills seem to be in no hurry to address their March fixations.

The CFTC spec/hedge report for the week of November 3-9, during which December traded between 115.77 and 120.50 cents, showed only minor changes. Speculators bought just 0.07 million bales and the trade covered 0.03 million bales, while Index funds sold 0.10 million bales. 

Over the last five reports speculators have sold 1.70 million bales net to reduce their net long to 9.76 million bales, whereas the trade bought 1.78 million bales net to cut its net short to 17.97 million bales. While there has been some progress in bringing these positions down, they nevertheless remain at historically high levels. 

US consumers continued to spend at a strong pace in October, as retail sales were up 1.7%, although Clothing & Clothing Accessories saw a decline of 0.7%. As we have stated last week, US imports are at a record pace and so far the flood of containers entering the US has yet so subside. 

Never before in history have we seen such a ‘wealth effect’, as government transfer payments in the trillions and rising asset prices have given consumers the cash and balance sheets to go on a massive shopping spree. Just look at the US stock market capitalization, which has risen from around USD 34 trillion at the end of 2019 to a current USD 51 trillion. That’s 17 trillion dollars in paper gains since the beginning of the pandemic! 

Add to that the over US 3 trillion dollars in total cryptocurrency value and it is no wonder why workers are quitting their jobs at a record pace. Why slave for a company if one can get rich by playing in the financial casino? It’s like betting at the roulette table and winning at every turn of the wheel. 

The fear of inflation has further stoked this buying frenzy, as people have been chasing goods and assets for fear of having to pay more for them in a year or two. This has bought a lot of demand forward, which in turn caused prices to spike even higher. 

However, there might be trouble ahead, as government transfer payments have for the most part dried up and the savings rate has slipped back to its long-term average. This means that in order to get more cash, consumers will eventually have to divest some of their assets. 

While a lot of people feel wealthy when they look at their monthly broker statements, cashing these gains in is a different story that might not end well for many people. Once we start to see profit-taking and the stock market shifts into reverse, it could quickly snowball into a steep decline. 

So where do we go from here?

The market has been trading sideways for the last three weeks and the December liquidation failed to cause a big spike as some have feared, despite zero certified stock on hand. 

We therefore still feel that March will see a correction as we head into the holiday period, as mills are not yet ready to deal with their March fixations. China will probably still be there to buy the dips, which together with the large amount of outstanding mill fixations should provide decent underlying support. 

The long-term outlook is murky and it depends on whether we finally see a ‘risk off’ move in the financial markets or not. This ‘everything bubble’ is by far the biggest we have ever witnessed and it needs to be continuously fed by more money, and that’s where we see a problem going forward. The question is when!


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