Output of G-8 meeting disappoints traders apparently

July 10, 2009 - Global

NY futures closed basically unchanged this week, as December advanced just 21 points to close at 61.13 cents.

Before today's turnaround the cotton market had been on the defensive, pressured by negative outside markets and a US dollar that tried to show some strength. Crude Oil futures declined 10 dollars a barrel in a little over a week and the stock market has started to soften again as well.

Even though the cotton market had three losing sessions early in the week, they occurred in relatively small volume and on each occasion the close was well off the daily low, which indicated that there was decent support waiting underneath. Nevertheless, today's rally came as a bit of a surprise, much like the strong performance last week. What's encouraging for the bulls is that it again happened in increasing volume and that today's gains eclipsed the accumulated losses of the previous three sessions.

The question as to what or rather who is behind this strength is still a bit of an enigma. Last week's rumors that index funds were committing new money to our market proved to be true according to the latest CFTC report. As of June 30, index funds had increased their net position by 5'397 contracts to 67'004 contracts. This was the biggest weekly increase since February 2008, when index funds' net long position amounted to roughly twice the current size.

It is somewhat surprising to see new index fund money coming in at a time when the CFTC is holding hearings on how to regulate such investments. One theory is that additional positions are being placed ahead of new restrictions in the hope that they would be 'grandfathered in'.

Traditional speculators continued to be light net buyers last week, while the trade took the other side of index and hedge funds and increased its net short position after several weeks of reducing it. This seems to be an indication that the trade does not believe in these high futures prices.

Today's rally was probably caused by a combination of factors, such as the rebound in outside markets, renewed pressure on the US dollar, strong export shipments and an improving technical picture.

US exports of 337'100 running bales last week lifted total shipments for the season to 12.25 million bales as of July 2nd and with four weeks to go it is almost a foregone conclusion that exports will surpass the current USDA estimate of 12.7 million bales by some 400'000 - 500'000 bales.

Tomorrow the USDA will release its latest supply/demand estimate and it is widely believed that the US numbers will present a slightly bullish scenario, while world numbers are not expected to reflect big changes. When we look at the US balance sheet, we started the season with a 22.85 million bales of supply, of which 3.55 million are taken by domestic mills and 12.25 million bales have so far been exported.

That leaves just 7.05 million bales in inventory, of which 3.0 million are already committed for export and probably around 0.9 million have been booked by domestic mills for Aug/Oct delivery. This means that just a little over 3 million bales of current crop remain available for sale at this point. Considering that China is about to release another import quota of about 1.8 million bales and that traditional export markets still need supplies for summer shipment, it is quite possible that the US will be nearly sold out by October.

The US dollar made an attempt to rally this week, but it proved to be short-lived. Traders apparently didn't like what came out of the G-8 meeting, where the US dollar was treated like the proverbial elephant in the living room, with world leaders avoiding the issue altogether. However, in separate meetings by the so-called Group of Five, which includes Brazil, China, India, Mexico and South Africa, it became clear that these nations are increasingly looking to avoid the US dollar and instead want to use their own currencies to settle trade.

Yesterday's report that China's light vehicle sales rose 48% in June was just another reminder of how quickly the global economic landscape is changing. China sold 872'900 cars, SUVs and pick-ups in June, which compares to just 859'847 vehicles sold in the US. Thanks to the sharp increase in developing countries, global car sales are estimated at 51.9 million units this year, which is less than in the last two years, but still over 2 million units more than in 2006 or any year before that.

We mention these car statistics to caution against getting too negative by what is happening in the US and Europe. While consumers in the West are facing severe problems, there is another world out there that is slowly but surely filling the void. And what we are seeing in the case of automobiles may to some extent hold true for textiles as well.

So where do we go from here? Even though we closed at the same level as a week ago, we have learned this week that the market is well supported and able to withstand pressure from outside markets. Although the futures market still appears to be overvalued compared to physical prices, this week's price action leads us to believe that speculators may be able to push the market through nearby resistance over the next few sessions. A friendly USDA report tomorrow could serve as the catalyst to do so. However, even if such a breakout were to occur, we don't think that the market would run very far to the upside and instead it may simply settle into a somewhat higher trading range.