A look at the candlestick chart reveals just how depressing the price action has been for the bulls, with the market closing lower than it opened in all but two of the last twenty sessions! What was it that spooked the cotton market into such a dismal performance?
We believe that a combination of factors contributed to this relentless selloff. For one, markets don’t like uncertainty, and there has been plenty of it lately with the US government shutdown preventing important reports from being released in a timely manner.
Traders are only slowly starting to catch up on data and we still don’t have an up-to-date “Commitment of Traders” report or a recent USDA supply/demand estimate. There is also a lot of uncertainty when it comes to China, with a variety of rumors making the rounds regarding the timing and price level of potential Reserve auction sales as well as the government’s support policy for the coming season.
The most recent CFTC report as of October 15 showed that large and small speculators liquidated over 10’000 longs in a week during which the market traded sideways between 83 and 84 cents.
There was no obvious reason for specs to pare their bets by a million bales at that particular time other than perhaps playing it safe in view of the ongoing government shutdown. The following week, when the market fell through long-term support, specs definitely had a valid reason to dump their remaining longs, although we have yet to find out how much they actually liquidated.
The negative impact of specs abandoning their longs got exacerbated by the rapidly expanding harvest in the Northern Hemisphere, which canceled out any remaining weather premium and prompted traders to become more aggressive with new crop offers. In other words, the lack of data, technical weakness and better than expected crops were the main reasons behind the market’s steep tumble.
However, as today’s US export sales report has shown, not all news is bad! Although the report contained 3 weeks worth of sales, the combined total of 690’800 running bales of Upland and Pima cotton is nothing to sneeze at, since the weekly average still amounted to over 230’000 bales. There were 21 markets participating in the buying, with China leading the way at over 300’000 bales.
Shipments of just 250’300 bales were still lagging, but that’s because the supply pipeline is basically empty and new crop is just starting to fill it back up. For the season total commitment now amount to around 5.1 million statistical bales, whereof just 1.8 million have so far been exported.
There is definitely export demand out there, and not just for US cotton, as a number of other origins have also found decent interest in recent weeks. In fact, physical prices have held up a lot better than NY futures lately and basis levels have therefore strengthened.
| On 26th Oct 2021
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