While the dry and hot summer affected mike and staple, we now have rain that is threatening to render some of this cotton too low for certification. West Texas is expecting a low-pressure system to bring widespread precipitation to the area Friday and Saturday, with rainfall totals of 1-2 inches in most locations. While this is generally good news for the drought-stricken area, it comes at a very inopportune time, since the crop is open and vulnerable.
So where do we go from here? Cotton fundamentals look fairly well balanced to us at the moment, with mill use plus Chinese Reserve buying more or less matching production this season, which argues for a continuation of the current sideways trend. We therefore need to look outside the cotton market for potential catalysts to break out of this range. The most obvious is another meltdown in the financial markets, stemming from a sovereign debt default or a banking crisis.
Although we believe that the global financial system is in serious trouble, the preemptive strikes that have recently been launched by policymakers and central bankers may postpone the day of reckoning by a year or two. Also, unlike in 2008, investors are expecting the worst and have already trimmed their positions quite considerably and raised cash in the process.
This makes another deleveraging phase like three years ago unlikely. Just look at the latest CFTC report, which shows large specs/hedge funds at just 1.7 million bales net long (3.0 million gross long and 1.3 million gross short), while index funds are 4.8 million bales net long. These positions are less than half of what they were three years ago.
With everyone playing defense at the moment, hunkering down in 'risk off' mode, the surprise may actually come from a return to a more aggressive investment stance by money managers. The world is currently awash in liquidity, which is parked mainly in the bond market.
However, this money is being punished by negative real interest rates (nominal rate minus inflation) and sooner or later there will be a renewed appetite for 'riskier' investments, such as commodities. And since commodity markets are relatively small in the overall scheme of things, it won't take much to get the ball rolling. Until that happens though, the market will likely remain stuck in the sideways pattern it is currently in.
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.jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "UBM China (Shanghai)")
-Ltd..jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "Thermore (Far East) Ltd.")
