PLEXUS Market Comments
Posted : March 25, 2023

PLEXUS Market Comments


NY futures added to their gains this week, as December moved up another 312 points to close at 86.38 cents.

Since posting a low of 70.21 cents on October 31, the December contract has rallied an impressive 19 cents in just seven sessions, posting a high of 89.31 cents on November 8, before finally cooling off a bit. Trading volume has been massive, averaging 63.5k contracts over the last nine sessions.

What’s remarkable is that the market moved into the high 80s without losing any open interest, as it took this week’s GSCI roll to finally bring down these open bets. As of this morning, there were still 230.8k contracts open, which is just 25k below the recent peak.

Spreading dominated a lot of the action, as the Dec/July spread went from 25 points carry on October 28 to a 304-point inversion today, while the Dec’22/Dec’23 inversion widened by 703 points, going from 95 points to 798 points. In other words, December has been the locomotive that pulled the rest of the board along. To us this signifies that this rally was the function of a speculative ‘bear trap’ rather than supply woes. If the latter was the case, then July would have marched in lockstep with December.

The latest WASDE report gave both camps something to gripe about, as the bulls didn’t seem to agree with the 14.03 million US crop number, while the bears were scratching their heads about the still too optimistic mill use number, which at 114.95 million bales is simply not rooted in reality.

The USDA has global mill use just 2.4% down from last season’s 117.4 million bales, but many mills in key consuming market keep telling us that they have been running 20% or more below their usual output since June, with no immediate improvement in sight.

A back-of-the-envelope calculation gives us at least an 8-10 million bale drop in mill use compared to last season, but if economic conditions won’t improve anytime soon, the contraction will get a lot worse.

We therefore can’t really draw any useful conclusions from recent WASDE reports, since the numbers are too far off base in our opinion. However, the report still carries a lot of weight, since speculators, who are not too familiar with the cotton world, react to these headline numbers.

US export sales were decent last week, as net new sales amounted to 157,800 running bales of Upland and Pima cotton, with China being the main buyer with 57,300 RB. In total there were 13 markets buying, while shipments of 111,500 RB went to 19 destinations. The fly in the ointment was a cancellation of 13,200 RB by Turkey, which is a market that has been struggling greatly this season.

Total commitments are now at 9.1 million statistical bales, whereof 2.85 million have so far been exported. The numbers were similar last season, when we had 9.15 million in sales and 2.3 million bales shipped.

Today’s US CPI data was good news for financial markets, as the year-on-year inflation number dropped to 7.7%, which was below expectations and compared to 8.2% last month. The Core CPI was at 6.3% annualized, also lower than expectations and the 6.6% of a month ago.

With inflation starting to trend lower, the 10-year yield dropped 0.32% to 3.82%, which prompted a selloff in the US dollar and a massive rally in the US stock market. The Dow (up 3.7%) and the S&P500 (up 5.5%) were having their best showing in two years.

Although inflation seems to have peaked and will probably decline further, the market is soon going to realize that this is happening because we are now in a recession, which is no reason to celebrate. In other words, this is not the end of the bear market in financial assets, but a powerful bear-market rally that might carry on for a while longer. We believe that the deflating “Everything Bubble”, which includes stocks, bonds, cryptos and real estate, will inflict a lot more pain over the coming months.

So where do we go from here?

Considering that the US dollar dropped and the stock market rallied, cotton underperformed today, which could be sign that this impressive two-week rally might be running out of steam.

With December now basically liquidated, there is no reason for March to push higher at this point, considering that cash prices have hardly followed the lead of the futures market and demand remains depressed. The weaker dollar might extend the futures rally for a few more sessions, but without an improvement in demand the market will sooner or later revert back down again.

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