PLEXUS Market Comments
MARKET COMMENTS 29 Sept, 2022
NY futures continued their relentless decline this week, as December lost another 1138 points to close at 85.16 cents.
Just a month ago, on August 29, the December contract was still trading as high as 118.53 cents, but it has been all downhill from there, with losses amounting to over 33 cents, or about 28%. A month ago supply bulls still controlled the narrative, but the story has shifted to a negative macro outlook and bleak cotton demand.
The CFTC spec/hedge report for the week of Sept 14-20, during which December traded from a high of 104.17 to a low of 93.12 cents, provided an explanation for why open interest has been rising during this market decline. While spec longs liquidated, new trade longs more than made up for the difference.
Specs sold 0.69 million bales and reduced their net long to 1.66 million bales, while the trade bought 0.82 million bales (via new longs, not short covering!) and cut its net short to 8.45 million bales. We believe that these new trade longs are mostly hedges against unfixed on-call sales.
Financial markets remain under pressure, with the Dow, S&P 500 and Nasdaq all breaking below their June lows this week, opening the door for an even deeper correction, while crude oil is down over 40 dollars from its high of four months ago.
With the Fed slamming on the monetary brakes, the economy is clearly slowing, while the US dollar has been surging to a 20-year high. The US is perceived as somewhat of a ‘safe haven’ in these turbulent times and it also pays higher interest rates than other major currencies, like the Euro or Yen.
The strong US dollar is certainly one of the culprits behind the weak commodity sector, which has seen the GSCI Index drop 25% since June. Not too long ago traders were still betting on supply shortages and the next commodity supercycle, but price action has silenced many of these voices for now.
While there has been considerable underinvestment in the commodity space over the last decade, which has led to supply constraints in some key commodities, be it energy, food crops or industrial metals, central bankers have successfully starved the market of demand with their hawkish monetary policies.
They didn’t have much of a choice, because central banks can’t produce commodities and goods, so they had to pull the rug from underneath demand in an effort to stop runaway prices. Last year we simply had way too much money chasing a limited amount of goods, which sparked the worst inflation in four decades and forced central banks to suppress demand.
As outlined in our last report, global wealth has suffered greatly this year, with equities, bonds and cryptos accounting for losses in excess of USD 40 trillion so far, while real estate is just starting to join this parade of losing assets. To be clear, this money is not simply being transferred from one asset to another, but has evaporated! It is therefore no wonder that consumers are not in a spending mood these days.
US export sales were slow last week, as just 73,200 running bales of Upland and Pima were sold for both marketing years. Pakistan once again took most of it with 52,400 bales. There were just 9 markets with net increases in sales, while shipments of 188,900 RB went to 20 destinations.
Commitments for the current season are now at 8.35 million statistical bales, of which 1.9 million have so far been exported. This compares to 7.65 million in sales and 1.6 million shipped a year ago. While US commitments are currently at around 66% of estimated exports this season, there is a good chance that some of these sales will get cancelled in markets like China, Vietnam or Turkey.
US supply is currently projected at 17.6 million bales (beginning stocks + crop), of which 2.3 million are taken up by domestic mills and 1.9 million have already been exported. This still leaves 13.4 million bales that have yet to find their way to consuming markets, at a time when mills are burdened with inventories and are running at slower than usual rates. In other words, unless end-user demand improves, 13.4 million bales will be plenty!
While Hurricane Ian wreaked havoc in Florida, it spared Georgia’s cotton areas (2.4 million bales production), but will dump moderate amounts of rain on the Carolinas (1.4 million bales combined production). In other words, about 10% of the US crop might be affected by this storm, but losses should be minimal.
So where do we go from here?
December is approaching key support at 82.54 cents, which is the mid-July low. If it holds, which we expect to be the case, we might get a decent bounce. However, upside potential seems limited as long as we have slow demand, a strong dollar and weak economic growth.
The WASDE is still not reflecting the true supply/demand picture, because its global mill use number is significantly overstated. While the supply side is now more or less known, we expect to see several downward revisions in mill use over the coming months, as the USDA will sooner or later have to reflect reality.
We still expect the market to transition into a sideways pattern of somewhere between 82 and 95 cents. For prices to move higher than that, we need to see stronger demand!