The cotton market weakened earlier this week after renewed jitters about Spain and Italy led to another “risk off” move by money managers that put pressure on the entire commodity complex, including drought-stricken corn and soybeans.
Alarm bells went off after Spanish ten-year yields spiked as high as 7.75% this week, while Italy saw its yields rise to 6.7%. However, it didn’t take long for policy makers to respond, as ECB president Draghi assured markets today that the central bank would do whatever it takes to rescue the Euro. What that means is that the ECB is determined to keep its printing press running at full throttle. Emboldened by the announcement, traders quickly rushed back into buying riskier assets, along with the Euro. It’s becoming quite obvious that these recurring “risk off” episodes are less and less pronounced, as traders seem increasingly reluctant to react to bad economic news, realizing that central banks are able and willing to “paper over” any problem with another sea of liquidity.
These central bank interventions are slowly but surely changing the dynamics of the market, as speculators are less inclined to short stocks and commodities. Even though a bearish stance may be justified from a fundamental point of view, traders are starting to get tired of fighting the Fed and its cohorts. Just look at the paradox in the bond market, where we have an unprecedented mountain of debt, yet interest rates are at historic lows.
The Fed has rigged the game in the US treasury market by becoming its biggest buyer, thereby suppressing interest rates. The Fed currently owns more than USD 1.7 trillion in treasuries, easily surpassing China’s USD 1.2 trillion holding. Although the bond market may be the most obvious target of Fed intervention, traders in other markets are starting to understand that this ever-increasing amount of liquidity in the system is acting in favor of higher nominal asset prices and short-selling may therefore become a futile effort.
Today’s US export sales report was quite constructive at 153’100 running bales net for both marketing years. What impressed us most is that a total of 19 markets participated in the buying of Upland and Pima last week. This seems to indicate that US cotton is attractively priced and that other origins may not be so readily available anymore. As of July 19, the US has now sold 13.0 million statistical bales, of which 11.3 million bales have so far been exported. With 12 days to go in the marketing year, we should therefore get fairly close to the current USDA export estimate of 11.6 million bales.
Assuming that exports will reach 11.6 million bales by the end of July, there will be around 1.4 million bales in export sales that get carried into the new marketing year. In addition to that there are currently 2.8 million statistical bales on the books for the 2012/13 season, which means that there will be around 4.2 million bales in total export commitments at the beginning of August, most of which are for nearby shipment. In addition to that we need to reserve around 0.9 million bales for domestic mills for the August/October period.
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