NY futures remained under pressure this week, as July fell another 516 points to close at 146.86 cents, while December dropped 450 points to close at 122.08 cents.
The market is still searching for that elusive bottom, as buyers are as hard to find as they were four weeks ago, when the July contract was trading around 50 cents higher.
US export sales for the current marketing year continued to recede last week, as cancellations of 49’300 running bales outstripped new sales of 44’200 running bales. Total commitments now amount to roughly 15.9 million statistical bales, of which around 11.7 million bales have so far been shipped. Unless net sales numbers turn positive again over the next couple of months, it is unlikely that the current USDA export estimate will be met. Commitments would probably have to amount to at least 16.5 to 17.0 million bales in order to get 15.75 million bales in exports by the end of July. On the bright side, sales for the 2011/12-season continued to grow by 74’600 running bales, bringing total commitments for next season to already 5.7 million statistical bales.
It didn’t help our market that the CRB-index started to collapse this week, falling by around 8% since Monday and 5% today alone. Crude oil was down by over 10 dollars today, its biggest daily drop since the 2008 financial crisis. Just about all commodities were hit hard as speculators and investors cashed in some of their long holdings in the wake of weak economic data.
As we all know, perception often trumps reality when it comes to financial markets. Many investors believe that when “QE2” (‘Quantitative Easing’ by the Fed) ends in June and no new money-printing scheme follows it, the economy will once again hit the skids and depress stocks and commodities. With recent manufacturing and jobs data from the US and Europe clearly pointing to a slowdown, fear of deflation has started to flare up again.
Although the economies of the US and Europe are struggling and may even slip back into recession, this doesn’t necessarily mean that asset prices are going to deflate. Without interference from the Fed that would most definitely be the case, but as we have learned from the 2008 financial crisis, the Fed will act as the buyer of last resort and that’s not going to change. Once ‘QE2’ ends, who else but the Fed will be there to absorb a large portion of the roughly 4 trillion dollars in bonds the US government is issuing this year? The Fed may use different avenues in lieu of the so-called ‘Quantitative Easing’, but money printing will continue and this will invariably lead to higher inflation.
Contrary to what some investors may believe, inflation is always a monetary phenomenon. It would be a mistake to conclude that a weak economy cancels out the threat of inflation arising from a highly expansionary monetary policy. Just ask anyone in Zimbabwe! In fact, the weaker a debt-laden economy becomes, the more aggressive the Central Bank will have to be in order to reflate asset prices.
However, for now we seem to have entered another phase of de-leveraging, during which money is being moved from ‘riskier’ assets, such as commodities, into ‘safer’ instruments, such as cash and bonds. The good thing in regards to cotton is that spec involvement is currently relatively small compared to what it was back in 2008 or compared to other commodities such as crude oil, corn and precious metals. In other words, speculators don’t really have that much to move out of cotton market.
The latest CFTC report showed that large specs owned just 3.1 million bales in outright longs and 1.0 million bales in outright shorts, although they still had a relatively large spread position on at 9.4 million bales. The trade is currently the most dominant force in the market with 8.2 million longs and 16.1 million shorts. Index funds, which are a much more passive investment group, owned 6.3 million in outright longs and 1.3 million in outright shorts, while the fourth group, small speculators, owned 2.0 million longs versus 1.4 million shorts.
So where do we go from here? A weak cash market and negative vibes from outside markets are exerting pressure on NY futures at the moment. In order for the market to stabilize we need to see mills step forward in greater numbers. There are still 2.4 million bales to fix in July, which should provide some support, but what’s really needed is a decent round of mill buying. Until that happens, the spot month will probably continue to drift lower.
New crop seems quite attractive at current prices given the planting problems in the US, where some areas are being inundated, while others remain in desperate need for some rain.
Best Regards
