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NY cotton futures continue to advance
May '09
NY futures advanced further, with July rallying another 224 points to close at 54.35 cents, while December gained 143 points to close at 57.46 cents.

The last two sessions serve as good examples for how easily this market can be pushed around due to the fact that there isn't lot of participation at the moment. In yesterday's session the market was up nearly a cent as we headed into the close and all it took was a sell order of a few hundred lots to knock prices down by almost a cent. Today it was the reverse, with a buy order near the close surprising some traders, lifting the market by over 130 points in the last twenty minutes.

Even though we are seeing only some sporadic buying at the moment with open interest expanding ever so slightly over the past few sessions, shorts seem to have the weaker hand as they either have no reason or no additional money to fend off even the minimal amount of buying there is. Just imagine what would happen if buyers were to enter the market in earnest!

Specs follow trends and with the chart displaying a nice uptrend channel there is no reason for them to jump on the short side. Quite the contrary is the case, as spec shorts have been exiting their positions in recent weeks. The trade may intuitively be inclined to sell the market after this 12-cent rise, but it is already substantially net short and would need a good reason to justify additional short sales. The only reason we can think of is a physical long position that would require a hedge.

In the case of US cotton that is probably not going to happen, since only about 1.3 mio bales remain in the loan and because new crop is not being forward contracted in any significant quantity. There are still some foreign crops though (Central Asia, Australia, India) that could enter the marketplace and invite a short hedge, but outside of that we shouldn't expect much trade selling. As we have stated before, it is much more likely for the trade to be a net buyer of futures over the next few months as current basis-long positions are being sold to mills.

The big question is still whether spec funds are about to commit to the long side in a more forceful way? So far the data (open interest, spec/hedge report) tells us that everything is still relatively calm on that front, but we are sensing more interest by hedge funds to get back into commodities in general. The reason for these funds to seek investments in commodities may not primarily be tied to supply/demand expectations of any particular commodity, but rather to their expectations on the macroeconomic front.

Ever since the Federal Reserve announced in early March that it was going to engage in 'Quantitative Easing' by printing trillions of dollars out of thin air, short sellers have been getting out of positions and this has allowed stock and commodity markets to recover considerably. In April the S&P 500 index had the strongest monthly performance since early2000 and it has now advanced almost 30 percent over the last seven weeks.

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