The market’s 3-month uptrend, which began on June 4 from a low of 64.61 cents, has finally been broken when December dropped below its uptrend line after a bearish USDA report on Wednesday.
However, as was the case when the market was trying to go higher, there is not a lot of conviction behind this down move either, since we are still not seeing the necessary increase in volume and open interest that would validate an emerging trend.
There have typically been just one or two decent volume days during these moves, after which the momentum quickly fizzles in the following sessions. During Wednesday’s sell-off over 30’000 futures changed hands, but today’s volume was just half of that. The same goes for open interest, which hasn’t changed much in recent weeks, telling us that traders are simply swapping positions rather than forging a new trend.
On the way up we had specs covering shorts, while the trade sold into the advance and now there seems to be some spec long liquidation, which is getting absorbed by new scale down spec and trade buying.
There has been a lot of news to digest this week, both in the world of cotton as well as on the macroeconomic front. On Wednesday the USDA surprised the market with a rather depressing 76.5 million bales global ending stocks number, which made for bearish headlines and caused a sell-off. However, as was the case with previous reports, we need to look at these numbers in greater detail in order to evaluate their potential market impact.
While the numbers for China were once again quite negative, with higher beginning stocks, lower mill use and fewer imports combining for a 1.3-million bale increase in ending stocks, the situation in the rest of the world does not look quite as dire.
Production outside China actually dropped by 0.1 million bales from last month, while mill use was raised by 0.4 million bales, although projected ending stocks were still 0.5 million bales higher due to beginning stocks revisions in India and Australia. From a trade perspective we had two major exporters with crop reductions, the US (-0.54 million bales) and Brazil (-0.65 million bales), while India saw its output increase by 1.0 million bales.
On balance we see the numbers outside China as neutral compared to the August report, while China itself looks more bearish. However, while China is now expected to import less than half as much cotton as it did last season, there is a strong trend towards higher yarn imports, which should mitigate the negative impact.
As long as cotton is allowed to flow into China, be it as raw cotton or in the form of yarn, it will act in support of international prices. Also, as stated last week, we do not agree with USDA’s very pessimistic global consumption numbers of 104.3 million bales for last season and 107.6 million bales for the current marketing year.
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