NY cotton futures drop

19 Nov '11

6 min read

Another interesting feature this week was the Dec/March spread, which saw a wild swing of over 500 points since November 8, reversing from 57 points "March over" to 490 points "Dec over" on November 15, before settling at a 302 points "Dec over" today. It is difficult to offer a good explanation for this unexpected resurgence of the inversion. Maybe it had to do with the still relatively large amount of unfixed on-call sales, as procrastinators were being rushed into last minute fixations. But there was also a rumor that at least part of the US sales to the Chinese Reserve would allow for 1.1/16-staple to be delivered. If true, it would mean that a big chunk of the certified stock, which otherwise is considered unattractive and overpriced, may have found a home.

The last recap of the certified stock, which includes about 48'000 bales, has 28'000 bales with staple 1.1/16 and longer, while about 20'000 bales are 1.1/32. Even though some of this certified stock may have found a taker, the fact that December has once again inverted so strongly above March should attract a lot more unwanted short staple cotton to the board. It will be interesting to see how the December story plays out when we head into First Notice Day next Wednesday.

As we have already alluded to, the European debt crisis was once again weighing heavily on financial markets today. The fact that both Italian and Spanish 10-year yields are hovering near 7% is like a 'vote of no-confidence'. Investors seem to leave these riskier markets despite the high yield being offered and instead favor low-yielding German and US bonds. The European Central bank has once again stepped in and taken the place of these fleeing investors. However, the European monetary union seems to be closer than ever to a collapse and apparently Germany and France are already making contingency plans on how to proceed if the system were to melt down.

Traders continue to be torn between two scenarios when it comes to the debt crisis, which is not just a European, but a global phenomenon. On the one hand there is the treat of severe deleveraging, because the notional derivatives exposure tied to sovereign and bank debt is a gigantic house of cards. On the other hand there is the willingness by politicians and central bankers to keep the debt bubble afloat by pumping ever-increasing sums of money into it, money that is created out of thin air, which is highly inflationary. Needless to say that markets hate uncertainty and we can't blame speculators and investors for adopting a 'better safe than sorry' attitude.

So where do we go from here? China is still the main supporting factor in the cotton market at the moment, but it remains to be seen whether it is potent enough to stem against a growing bearish tide. As crops are moving in and unsold supplies keep building in non-US origins, we expect to see some additional hedge selling by the trade. And since speculators are not likely to buy the market in the current environment, we should therefore see a softer market in the weeks ahead.

Plexus Cotton Limited

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