MARKETS SUFFER FROM POLITICAL AND ECONOMIC UNCERTAINTY

• Stocks, Crude Oil, Commodities Among the Victims
• Weekly Export Sales a Bright Spot
• Harvest Marches on in Some Areas, Not in Others
• Is U.S. Cotton Now More Price Competitive?

It has been an awful week for the markets, cotton included. Major stock averages are down more than 5 percent for the week and around 15 percent off their record highs in September. Yields on government debt instruments have fallen as investors look for cover. Crude oil has traded as low as $45.13 per barrel, its lowest level since July 2017, and the broader commodity market has suffered along with it. Unfortunately, cotton was not immune to the sell-off. March futures fell from a high of 79.80 cents per pound on Monday to a low of 73.07 just before the close of Friday’s session. Open interest has fallen every day this week, dropping 6,190 contracts for the week to 214,877 as of Thursday’s close, which puts the number of open contracts at its lowest level in 17 months.

MANY BEARISH FACTORS

Traders in every sort of asset class have been running for the exits. Unfortunately, the list of political and economic risks is too long to detail in this weekly letter, but a partial list would include: the Federal Reserve increasing interest rates (against market hopes), the threat of a partial government shutdown, the Department of Justice indicting Chinese hackers for economic espionage during trade negotiations, the withdrawal of U.S. troops from Syria, Secretary Mattis’ resignation, and increased chances of a “Hard Brexit” in Europe.  In short, the list of uncertainties and unwanted outcomes seems to have utterly overwhelmed markets, and it seems unlikely that many will put their funds back at risk before the dust settles.

EXPORT SALES AND SHIPMENTS

It was not enough to undo outside forces, but cotton’s outlook actually improved this week. Thursday’s Export Sales report showed foreign mills booked 142,300 bales of U.S. cotton in the week ended Dec. 13, with Vietnam (49,400) and Bangladesh (46,500) leading the way. That is not a huge volume, but sales only need to average about 150,000 bales per week to reach USDA’s current forecast. Furthermore, mills were willing to book that cotton while March futures were trading above 78.00 cents per pound. Shipments remained steady, too. So far, the U.S. has already shipped 3.12 million bales to the export market this year, about 230,000 more than at this time last year.

UNFAVORABLE WEATHER IN THE SOUTHEAST

Harvest continues to drag much longer than normal in the Southeast as rains continue to hamper progress. More precipitation is expected next week, too. Southwest cotton is mostly harvested, although Kansas still has a fair portion in the fields. Next week may bring some precipitation to our region, but with most of the cotton off the stalk, those rains are increasingly welcome. In fact, the long-range forecast is for a wetter Winter and Spring thanks to a modest El Nino.

U.S. COTTON MAY BE MORE ATTRACTIVE

Without speculators and investors to buy up the market, prices may remain under pressure until they are too irresistible for mills to pass up. That may already be the case for some. This week’s sharp decline has put import cotton back into a competitive position for Chinese buyers. Additionally, lower prices are likely to trigger Minimum Support Price (MSP) operations by the Cotton Corporation of India (CCI). The CCI is tasked with buying from India’s producers when local spot markets fall below published levels, but it can take some time for the CCI to accumulate enough cotton to make a difference. With the CCI buying spot market cotton at a relatively high price, Indian mills and the markets that depend on India’s exports can take advantage of lower international prices.

CONFUSION REIGNS

Traders and analysts are as confused and worn out as ever. There is little information upon which to build conviction, and it is difficult to say when clarity will come. Outside markets and mill buying matter more than anything from here as a speculator-driven rally looks unlikely. As a reminder, next week will be a short trading week as we celebrate the Christmas holiday. The exchange will be open for a shortened session on Christmas Eve, but volume is typically very light. We wish all our readers a very Merry Christmas.

IN THE WEEK AHEAD:

• The CFTC Cotton On-Call report to be released Thursday at 2:30 p.m. Central Time.
• The Export Sales report will be released Friday at 7:30 a.m. Central Time.
• The CFTC’s Commitments-of-Traders will be released Friday at 2:30 p.m. Central Time.