PLEXUS Market Comments
MARKET COMMENTS 22 Sept, 2022
NY futures continued to cave in this week, as December dropped 675 points to close at 96.54 cents.
What a difference a year makes! Twelve months ago December was trading in the low 90s as well, but it was on its way to an eventual top of 155.95 cents in early May. Back then demand was strong, as consumers were flush with money thanks to generous government handouts and lockdown-induced savings, while the supply chain was struggling to cope with a 25% increase in container traffic.
The opposite is the case now, as mill demand has contracted sharply in recent months, with no imminent rebound in sight. Yarn prices have collapsed all over the globe, as consumers have much less discretionary spending power due to higher living expenses and falling asset prices, which have led to a negative wealth effect.
Global stock market capitalization is down USD 26 trillion from its high, while the Bloomberg Global Aggregate Index, which tracks over 28k global bonds with a current market value of USD 58 trillion, is down nearly 18% this year. Bitcoin is down over 70% from its high and the decline in real estate is just gaining momentum. It should therefore come as no surprise that consumers don’t feel their best right now, which is reflected by record low consumer confidence indexes, both in the US and Europe.
Adding insult to injury, the Fed raised interest rates by another 75 points yesterday, to a target range of 3.0 to 3.25%. The statement of the Fed was much more hawkish than what the market had hoped for, as Chairman Powell stated that further rate increases were appropriate until inflation gets down to 2 percent. This means that an already struggling economy will probably slow down a lot more, which doesn’t bode well for consumption.
Higher rates have also helped to boost the US dollar to a 20-year high, making it harder for dollar-denominated debt around the globe to be serviced. Sovereign debt crises are likely and we have already seen IMF bailouts for Sri Lanka, Pakistan, Zambia, Egypt and Chile, while China has redirected its own IMF reserves to help several African countries. We believe that we are just at the beginning of a much deeper global debt problem, with as many as 30 countries seeing their foreign exchange reserves dwindle.
US export sales reflected the slow pace of demand, as just 46,000 running bales of Upland and Pima were sold for both marketing years, with Pakistan accounting for 36,600 RB. Shipments were relatively strong at 232,700 running bales, considering that we are in-between crops and that supplies are currently running low.
Total commitments for the current marketing year are at 8.3 million statistical bales, of which 1.7 million have so far been exported. This compares to 7.05 million in sales and 1.45 million shipped a year ago. However, we hear of potential cancellations or buybacks in some markets, especially where shipments are several months past their due date. In other words, we need to take the current commitment number with a grain of salt!
The CFTC spec/hedge report for the week of Sept 7-13, during which December traded between 101.19 and 108.10 cents, showed a further reduction in spec long and trade short positions. Speculators sold 0.34 million bales to cut their net long to 2.35 million bales, while the trade bought 0.37 million bales to reduce its net short to 9.27 million bales.
Interestingly, futures open interest has gone up about 5k to 214k contracts over the last five sessions, which suggests that there hasn’t been much additional liquidation, or that traders who got out were replaced by others getting in at lower levels.
The CFTC on-call report showed very little progress in terms of mill fixations, as unfixed on-call sales from December to July were down just 0.2 million to 9.10 million bales as of last Friday. There were still 5.28 million bales unfixed on December alone, with about two months to go until the Dec notice period. The fact that mills are in no hurry to fix reflects the dismal state of their business in our opinion.
So where do we go from here?
With the supply side becoming more defined, the market is now increasingly focusing on demand, which shows a rather discouraging picture at the moment. In some key markets, like Turkey or Vietnam, mills are running up to 50% below their usual capacities, but the struggle seems universal. We hope that the USDA takes note and will finally go over its unrealistic global mill use number, which is still near the same level as last season.
The market built in some risk premium yesterday, as there is a high likelihood that we will get Hurricane Gaston in the Gulf of Mexico next week, which could pose a threat to open crops in the Midsouth or Southeast. Traders probably don’t want to go short into the weekend, but if this storm turns out to be another dud, the risk premium will quickly evaporate.
Unless demand improves, we don’t see much upside potential, but at the same time we need to be careful not to get too bearish, since the current price differential to soybeans and corn will make it difficult for cotton to defend its acreage next season. Higher input costs are another reason not to get too negative on cotton prices, especially with Dec’23 already at 80 cents.
We therefore feel that the market will move sideways in a 10-15 cents range in the foreseeable future, similar to where we were before the August WASDE.