So where do we go from here? The short-term trend is still pointing lower, although Wednesday's session offered hope that some sort of a bottom is within reach. Physical prices still hold the key to this market in our opinion. If they continue to hold up as well as they have been this week, then the futures market will sooner or later have to turn back up.
One positive in this regard is that the US crop is over 85% committed at the grower and merchant level, which means that there is relatively little pressure to get the balance sold. This would be different if the crop was only 40% or 50% committed, because merchants would be much more aggressive to push sales than they are now.
Developments on the macro front may continue to spook hedge funds and the clamp down on speculators in China could cause prices to come under additional pressure over the coming sessions.
However, we need to bear in mind that consumers in China are probably not going to buy fewer jeans and T-shirts because of these government measures and that the drop in cotton prices is likely to mitigate the anticipated demand destruction, which should be bullish in the long run. Also, with inflation flaring up all over the globe while central bankers keep interest rates artificially low, real interest rates are dropping deeper into the negative, which is bullish for commodities.
In summary, we believe that the market has value at current levels but we can't rule out further downside pressure from the spec sector in the short term.