NY futures rebounded this week, as July advanced 91 points to close at 80.76 cents, while December gained 223 points to close at 77.74 cents.

We have seen an interesting trading pattern over the last five sessions, as July was trying to get something going to the upside, but got rejected time after time. After spiking to intra-day highs of somewhere between 81.60 and 82.49 since last Friday, July was unable to hang on to these early gains and closed well below the high by the end of the day. Interestingly, over these last five sessions July settled in a very tight range of just 67 points, between 80.37 and 81.04 cents.

This kind of action suggests that the market isn’t quite ready to pay more than 82 cents at the moment, but there seems to be a decent amount of buying between 80 and 81 cents. Support is coming from the large contingent of trade shorts in July that still needs to cover over the next five weeks, while the certified stock of nearly 1.1 million bales is keeping a lid on the market for now.

There are two trains of thought regarding the certified stock. Some traders argue that there is still enough cotton in the global pipeline to render the million plus bales of certified stock obsolete. If this proves to be true, then the certified stock will be a burden, since it is relatively expensive in terms of cash cotton with no carry in the market to entice its owners to hold on to it. However, there are others who believe that there is still a tremendous amount of demand out there for summer shipments, especially from China, that will require the certified stock to make ends meet.

Only time will tell, but with every strong export sales report the argument of the bulls becomes more valid. Last week the US sold another 386’300 running bales of Upland and Pima for the current and next marketing year, which brings total commitments for this season to 11.7 million statistical bales, while there are now 1.0 million bales on the books for August onwards. The fact that 20 markets joined in the buying, with China taking around 100’000 bales, tells us that US cotton continues to be very competitive, if only for a lack of alternatives.

It is quite telling that the current composition of the A-index contains all three US growths, with MOT being the cheapest of the bunch at 87.75. The other two quotes in the index are from West Africa, which does not seem to have a lot of cotton left for sale at this point. Beyond that there are just Central Asian (90.25), Australian (90.75) and Uzbekistan (94.00) still quoted for June/July shipments.

Earlier this week the USDA gave us its first detailed look at the coming season. The main message to take from this supply/demand report is that despite a strong rebound in global production it will probably not be enough to catch up to world consumption. This would make it the fifth season in a row in which world output has fallen short of mill use. As a result the global stocks-to-use ratio is expected to drop to the lowest level in 16 years. The foreign production gap is projected to be the second highest ever at 18.6 million bales in 2010/11, after setting a record of 21.8 million bales in the current season. In other words, supplies are going to be fairly tight again next season and apart from seasonal tendencies we may not see prices drop much from current levels.

Macroeconomic developments are another factor that could weigh in on the bullish side of the equation. Last weekend the EU and the IMF took unprecedented measures to preempt an escalating sovereign debt crisis by announcing a rescue package of up to a trillion dollars! While it may be a noble intention to rescue the sinking European ship, we need to be cognizant of the fact that the funds for such a bailout do not exist and therefore have to either be borrowed or printed. Like the United States, Europe is now trying to solve its debt bubble by pumping more money into it. In our opinion it is only a matter of time until there is going to be a serious funding crisis that will result in higher interest rates and inflation. Under such a scenario nominal prices of tangible assets, such as commodities, are going to rise. It is no coincidence that gold, the only ‘hard’ currency left, has broken out to a new all-time high this week.

So where do we go from here? From a technical point of view the July and the December contracts have quite different appearances at the moment. While July has been forced back into its old sideways range dating back to late February and seems to go nowhere in a hurry, December looks quite strong and is within half a cent of a five-month high, with a chance to break out to the upside if it closes above 78.25 cents.

From a fundamental point of view the jury is still out on the July contract and much will depend on the fate of the certified stock. China holds the key in our opinion, because if we were to see strong imports from China over the coming weeks, the certified stock might disappear and trigger a short-covering rally. However, if China can somehow get by with its remaining stocks and a limited number of imports, then the certified stock may do its job and keep a lid on the market or even force prices lower as we head into the July notice period.

Although December looks quite strong at the moment, we believe that there will be strong resistance from grower selling over the coming weeks that will keep the upside contained. Near 80 cents we should see grower selling outweigh any mill buying, while the opposite would be the case if December were to slip towards 70 cents.

Best Regards