NOVEMBER 2, 2018

NUMEROUS FACTORS DRIVE THE MARKET THIS WEEK

• Open Interest Increases
• What is Causing Volatility?
• Strong Reaction to President’s Tweet
• Are Market Forces Shifting?
• What Will Draw Attention Next Week?

The cotton market began the week with a sharp decline back toward the bottom of the recent price range. Mid-week trading was exceptionally quiet. Wednesday set the December futures low at 76.49 cents per pound, but there was very little volume traded. The session’s price range was only 55 points wide. Nevertheless, the market roared back to life Thursday. Trading volume spiked as the market shot back up to recent highs. The number of open contracts has been increasing, too. Open interest climbed to 269,050 contracts on Friday, which is up 5,429 for the week and the highest level since August.

TWEET CHANGES MARKET OUTLOOK

Macroeconomic policy continued to be the main driver of volatility this week, as demonstrated by Thursday’s activity. The U.S. Export Sales report showed net cancellations of 49,000 bales for the week ended Oct. 25, which sent the market back to this week’s lows after its release. However, a positive note from President Trump on his personal twitter account changed the market’s outlook soon after:

The stock market and agricultural futures responded with strong rallies. Soybeans (+3.6 percent) and cotton (+2.8 percent) were two of the biggest winners.

TALK AND ACTION MAY NOT BE THE SAME

While President Trump’s tweet does generate optimism for a deal with China, most sober-minded traders know that positive talk and an actual agreement are two different things. Cotton traders will be wary of staking too much on the mere possibility of a favorable outcome. Instead, trader focus is turning toward next week’s World Agricultural Supply and Demand Estimates (WASDE) report.

WEATHER’S EFFECT

Hurricane losses in the Southeast and generally negative harvest weather across the majority of the Cotton Belt are expected to significantly decrease USDA’s crop forecast in November. Although significant production losses are expected, poor export sales for the past several weeks also have raised the expectation that USDA will simultaneously reduce its 2018-19 U.S. export forecast, mostly offsetting the lower supply.

POSITIVE SIGNS EMERGE

Although the Export Sales report was negative, there have been some positive signs recently. Several competing countries’ currencies have recovered their summer losses, which is helping U.S. cotton to become more affordable to importers. Foreign export competition is weakening as shippable supplies already have been heavily committed. Additionally, the poor harvest weather in the U.S. has increased the supply of heavily discounted cotton, which may make U.S. cotton the most affordable price for many mills. The combination of factors is helping U.S. cotton return to competitiveness in the export market.

FACTORS TO WATCH NEXT WEEK

Traders’ attention will be heavily divided in the week ahead despite a desire to focus on the November WASDE report to be issued next Thursday. Outside factors include the China trade dispute, which is far from over, and the U.S. elections. Thankfully, downstream demand for textiles looks healthy, especially with U.S. payrolls coming in 250,000 higher and beating expectations by 60,000. Unfortunately, that news may spell further interest rate hikes and more headwinds from a strong U.S. dollar.   Harvest weather continues to be a challenge for the Southeast, but skies should be mostly clear this week in the Southwest. Classing reports also will continue to figure centrally in most traders’ routines.

IN THE WEEK AHEAD:

• Crop Progress and Condition will be released Monday at 3:00 p.m. Central Time.
• The CFTC Cotton On-Call report to be released Thursday at 2:30 p.m. Central Time.
• The Export Sales Report will be released Thursday at 7:30 a.m. Central Time.
• The November World Agricultural Supply and Demand Estimates come out Thursday, Nov. 8 at 11:00 a.m. Central Time.
• The CFTC’s Commitments-of-Traders will be released Friday at 2:30 p.m. Central Time.