NY futures closed basically unchanged this week, as May added just 7 points to close at 91.68 cents, while December gained 39 points to close at 79.94 cents.
The market managed to consolidate last weekΆs gains, closing the last five sessions in a tight range between 91.27 and 92.20 cents/lb. There were a few attempts made to extend last weekΆs rally, with todayΆs high of 93.75 getting very close to last yearΆs March 15 high of 93.93 cents, but the market didnΆt have enough oomph to push through this important resistance area and ended up closing over 200 points lower.
YesterdayΆs attempt to sell off was equally unsuccessful, as the market bounced from a low of 90.44 to close at 92.20 cents. In other words, neither the bulls nor the bears were able to generate any sustained momentum this week, although the bulls still seem to have the upper hand in this battle so far, for a number of reasons.
First of all, the three-and-a-half month uptrend line, dating back to late November, is still intact and passed today just below the 90 cents mark. In other words, the market has some leeway before sell-stops become an issue.
Secondly, the inversion between May and July continued to widen further this week, growing from 90 to 182 points. This is a bullish sign and reflects tightness in the cash market as well as nervousness by the shorts.
Thirdly, the trade net short in May and July remains more than twice as big as the spec long. As of last week it still amounted to 10.5 million bales net, having changed very little in recent weeks. A substantial amount of this trade short is tied to basis-long positions of various origins and the 4.7 million bales in unfixed on-call sales on May and July.
The question is how and when will these trade shorts finally get out? The futures market is a zero sum game, which means that every long position has a corresponding short position. At the moment we have roughly one spec long and one index fund long for every two trade shorts. In order for trade shorts to get out, they will either have to find a spec long or an index fund long willing to sell. Index fund longs will eventually sell their May and July futures, but they will do so by rolling to the next month at specific dates, and since they are just rolling forward, their net long position doesnΆt change.
Spec longs are mainly trend followers and as long as the chart points up, they are likely going to stay with their positions and may even add to them, as we have seen last Thursday when a prominent hedge fund chose to enter the game. In order for these specs to sell, a trend reversal needs to occur first, but so far there is nothing on the horizon in that regard.
The problem for many of these trade shorts is that they donΆt have the luxury of waiting, since physical prices have not been moving up at the same speed as futures, which has put pressure on the basis. Shippers are therefore trying to get out of physical longs and buy back short futures before the basis drops even further. So we have a situation in which the trade needs to buy, hedge funds want to buy and index funds are on the sidelines, which is why the spot month has been trending higher and the inversion is widening.
Trade shorts are still hopeful that these dynamics will change and their best hope rests with some negative developments on the macroeconomic or geopolitical front. Today financial markets came under pressure on renewed concerns about ChinaΆs growth and increasing tensions in the Ukraine, and this has the potential to weigh on commodity markets as well if hedge funds were to move to a ΅risk offΆ position. As we have stated in our last report, hedge funds have committed massive amounts of money to the commodity complex in recent weeks, and if some of these newly established longs were to get cold feet, it could turn these bullish charts around rather quickly.
Another trump card the trade has up its sleeve is the ability to post a large amount of certified stock at the click of a mouse. Thanks to a new rule that makes it easy to increase the certified stock without having to go through the costly certification process, it wouldnΆt surprise us if merchants were to boost the certified stock for shock value, even if that cotton is already committed and there is no intention to tender it.
This weekΆs USDA supply/demand report contained no big surprises, as global output was left unchanged, while mill use saw some minor shifts in a number of markets. Rest of the world stocks declined slightly from 39.16 million to 38.94 million bales as a result of these adjustments. ROW stocks are likely to tighten further, since the latest Chinese import numbers already add up to 8.9 million bales for the first seven months of the season, which means that we are likely going to surpass the current USDA estimate of 11.0 million bales.
The most notable change in the USDA report was a 0.2 million bales increase in US exports to 10.7 million bales, which brings US ending stocks down to 2.8 million bales, the second lowest inventory in 18 seasons after the 2.6 million bales of 2010/11.
Speaking of exports, todayΆs US export sales report once again surpassed expectations, as 188Ά700 running bales of Upland and Pima cotton were sold for both marketing years to no less than 20 different markets. Yes, there were once again some cancellations, but that shouldnΆt distract from the fact that net sales are growing faster than they need to at this point in time and that there are still plenty of buyers lined up to buy US cotton. Total commitments for the season now amount to 9.7 million statistical bales, of which 6.2 million bales have so far been shipped. Sales for the 2014/15-season are at around 1.0 million bales and we suspect that a large amount of these sales will be shipped from existing inventories.
So where do we go from here? Considering that the market has advanced nearly five cents in two weeks and given the current uncertainty on the macro front, we wouldnΆt be surprised if the market were to test trendline support near 90 cents over the coming sessions. However, eventually the market should move to new highs as shorts run out of time and are forced to buy their way out of trouble. Only a negative event on the macro front that flushes out the longs would alter this scenario in our opinion. Expect trading to become increasingly volatile as we move forward!
Best Regards
