With harvest in the Northern Hemisphere gaining momentum, the market finally came under some pressure this week, as prices dropped back towards the 70 cents level. In doing so, the market has now decisively broken below the medium-term uptrend that had been in force since June 4, resuming the long-term downtrend that started 18 months ago.
The physical market has remained relatively quiet, as mills were in no hurry to change their current hand-to-mouth buying strategy. With supplies increasing rapidly as crops are moving in, we expect to see a sell side imbalance over the next two or three months, which should keep a lid on prices. In other words, we once again have the technical and fundamental picture pointing in the same direction.
US export sales of Upland and Pima cotton for the week ending September 20 were about as expected at 145100 running bales for both marketing years combined. Total commitments now amount to around 5.5 million statistical bales, whereof some 1.2 million bales have so far been shipped. Despite an apparent lack of import quotas, China remained the strongest buyer with 58’800 running bales.
Chinese buyers continue to find ways to get their hands on cheaper foreign cotton. On the one hand they are able to import cotton outside the quota system, as long as the price is below 80 cents and the full 40% tariff is paid. While that seems expensive by international standards, it is still cheaper than domestic values.
On the other hand China keeps on importing large amounts of yarn, with August imports amounting to over 132’000 tons, which is a record. That’s over twice as much as in August 2011 and calculates to nearly 1.6 million tons (7.3 million bales) annualized. We expect yarn imports to grow even stronger as long as this huge gap between Chinese and international cotton prices remains.
While the short-term trend is now clearly pointing lower, we cannot lose sight of the fact that we are in a completely new economic and financial environment, which in our opinion will have bullish implications for nominal asset prices going forward, with a few notable exceptions such as bonds.
Never before has the world been in a situation where all major economies are simultaneously trying to stave off a looming economic collapse by printing unprecedented amounts of money. After the ECB and the Fed announced open-ended bond buying programs recently, the Bank of Japan last week followed suit by announcing another round of QE in the amount of USD 127 billion and today it was the Bank of China with its plan to inject USD 58 billion into money markets.
Although many traders seem to conclude that a weak economy has to translate into lower asset prices, this isn’t necessarily true. If left alone, this would most certainly be the outcome, but not in economies where there is massive monetary intervention. History is full of examples in which an economy came to a grinding halt, yet prices skyrocketed.
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