One reason behind FridayΆs rally is the potential for positive news in USDA reports next Tuesday, Dec 10, such as a reduction to ChinaΆs crop and possibly higher imports.
I recapped some of the other reasons in an email Friday morning, including but not limited to the following:
The biggest news story of the day was US employment for November and they were shockingly good. Non-farm payrolls were +203,000 versus expectations of 180,000. The November unemployment rate at 7.0% versus an anticipated 7.2% vs 7.3% from October. And, October non-farm payrolls revised to only down to +200,000 from +204,000, despite ideas of lower numbers.
In the past year as traders have become fearful of the Federal ReservesΆ tapering efforts, healthy economic news has sent stock prices into a tail spin creating a phenomena of “good news is bad news and bad news is good news.” For instance, yesterdayΆs Q3 GDP was an outstanding number, but the stock market sold off. However, todayΆs employment data was so impressive, stocks enjoyed a sizeable rally.
Macro news for the US and China this week has been upbeat, which bodes well for cotton consumption if only in the short term.
From a chart perspective, the March broke through an overhanging trend-line prompting spec funds to cover and add to longs while buy stops were being hit.
The CFTC COT reports released on Monday, December 2, and today showed specs reducing their net shorts if not adding a few longs as of Tuesday, November 26, and Tuesday, December 3. The same chart shows the trend-line below the lows moving higher from the (presumably) seasonal low established on Friday, November 22, and the two crossing at a potentially price changing direction.
As was the case most days of this week, there is not a lot of new news for cotton or one story in particular that stands out that explains the two cent rally from a week ago when March settled at 79.35 on Friday, November 29.
In its daily report regarding certificated stocks, ICE showed 110K bales (more than half of the total) being removed from delivery position Thursday morning, but that news was not widely disseminated until Friday. The de-certing confirms ideas of the talker of the December deliveries plans to export the 2012 supplies.
Demand for cotton is healthy, with US exports showing another increase this week and China buying a big chunk of Indian cotton this past weekend at their cotton conference. Mills are more confident of a seasonal low being in place and therefore greater willingness to extent coverage at sub-80 cent prices.
China began its auction on Thursday, November 28, and despite worries to the contrary, cotton prices have held if not moved higher in futures and cash, I.e. A index.
The auction has not be particularly successful to date, with only 61% of offered cotton sold to mills. However, 98% of imported cotton included in the auction has sold, an indirect sign of Chinese mill interest in foreign styles versus their own crop from the 2011/12 crop year.
Quantities offered to date have been small, but I got the sense much greater quantities were expected by some traders and media. As mentioned many times in the past, Beijing has a HUGE investment in their strategic reserves and they are not going to “give away the store” in order to empty out supplies.
That is not how they have behaved in the past and I do not look for a change in their approach going forward.
Having said all of this, what I have noticed in viewing one of my quote services that shows the number of contracts bid and offered above and below the current market price is a change with mills increasing their bids and following the market vs specs with fewer offers. Hence the proverbial change in mentality from selling rallies to buying dips.
As good as todayΆs high looks, equal to the Nov 6 high and the high close which is the best since Oct 28 of 80.45 basis March, there are some stormy clouds on the horizon.
My technician says the following for Monday:
“March Cotton broke out on the upside, but caution is advised. First of all, it is entering the third week of advance and that works against continuation. The declining fifty day average offers another roadblock at 81.15. I would prefer to give the bullish argument a few more days to earn its keep, but Monday is 3 & 7 up calling for a lower close.”
Next weekΆs USDA cotton supply/demand report will carry a lot of weight on deciding if NortonΆs Ά3-week upΆ cycle is a problem for bulls or not.
Note: The trading limit for US cotton futures had back to 4 cents due to the close above 80 cents by the front months. Today, Dec 6 was last trading day for the December contract.
Sharon C Johnson