Bearish market fails to lure high inventory purchases

April 25, 2008 - United States Of America

Today is the first notice day for May08 contract, and the total notices posted were 839. Major issuers were Dunavant house account with 474 notices and JP Morgan customer account with 191. Major stopper was Newedge customer account with 704 notices and the balance scattered among different parties.

With still more than 3,600 contracts in K’08 open interest, more notices are expected to come. Trading today was choppy in thin volume as we looked at outside markets for direction. The friendly overnight ICE open didn’t hold well as the overall commodities weakness spilled over to cotton.

As dollar strengthened more than 800 points, prices in crude oil slipped same as in grains. Reinforced by the lower re-open of the Chicago market, majority of today’s session was trading back and forth around the 100 point lower level. Prices eventually sank under pressure from outside markets as well as bearish options to settle at near session low.

This morning’s U.S. export report (chart on page 2 in attached PDF) proved that overseas mills are in no rush to purchase inventory despite price drops in the NY futures market. Due to the tight profit margin, most mills are only buying hand to mouth. Since there’s plenty cotton around, they can afford to play the waiting game.

Also, with selling basis switched from K’08 to N’08, NYF needs to drop another 3 cents to make U.S. cotton competitive in the world market. New sales were slightly improved from 148,800 running bales upland and pima combined last week to 176,900.

Major buyers were Turkey with 59,300 bales, Indonesia with 28,200 bales and China with 23,100 bales. Shipments were slightly reduced to 284,900 running bales combined with 85,500 bales leaving for China and 32,500 bales leaving for Turkey.

The false breakout on April 16th, which tested the 82 cents basis N’08 was followed by profit taking sell off, thus negative technical pictures for the past sessions. N’08 has been range trading and tested the near term support at 72 cents today.

The strong lead cotton receives from the outside commodities market, or the CRB index, as well as the inverse relationship between cotton and dollar index are the rationales that have supported the recent market movement.

The cotton market feels like we could move sideways short term with more down side testing in the future. The next support lies in the mid 70 cent range.

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