NY futures fell precipitously this week, with December collapsing 460 points to close at 63.86 cents, while March dropped 417 points to close at 68.82 cents.
With commodities getting hammered and the US dollar surging higher, the cotton market did not stand much of a chance to hold against this indiscriminate wave of selling by speculators and as a result it fell through the lower end of a five-week trading range without much opposition.
The relative ease with which the market went through the 66 cents support level was particularly worrisome, but in the absence of any noticeable physical activity there was simply nobody brave enough to stand in front of this south-bound freight train.
Export business has been extremely quiet recently, with the last two export sales reports showing only 162'800 running bales, bringing total sales for the season to 4.8 mio statistical bales. While total commitments are just 0.2 mio bales behind last year's pace, shipments of 1.25 mio statistical bales are lagging 0.45 mio bales behind last season and they need to pick up considerably in order to make the fairly optimistic USDA export projection of 15.0 mio bales.
The strength of the US dollar has surprised many, including us, but this rebound is not the result of improving fundamentals but rather due to the unwinding of positions by hedge funds and banks that have wagered against the dollar and are now finding themselves on the wrong side of these bets, scrambling to get out.
Expectations of a narrowing interest rate spread between the greenback and some other major currencies, notably the Euro and the British Pound, have further added to this relative strength of the US dollar in recent weeks.
However, we believe that it is only a matter of time until bearish fundamentals, which are getting more pronounced with every new government bailout, will weigh on the US dollar again. Once this happens it will probably mark the end of this brutal selloff in commodities that has clipped 22 percent off the CRB index since the end of June.
The current meltdown in the financial markets and the accompanying fear that the world economy may be headed for a severe recession have caused an extremely negative sentiment in regards to consumer spending. In the cotton market we are seeing merchants dumping inventory, while mills are reluctant to commit, even at these discounted prices.
Is this pessimistic outlook in the case of cotton justified or is the market possibly overreacting? While we don't disagree that world mill use is not at the 124.5 mio bales the USDA has been suggesting so far, it would take a massive drop in consumption to turn the balance sheet bearish, because production is currently expected to be no more than 112.1 mio bales.
Tomorrow the USDA will give us its latest supply/demand estimate and the market has been apprehensive ahead of it, with many analysts expecting a bearish set of numbers. However, while it is quite likely that the USDA will scale back demand and possibly lift ending stocks, when we look beyond the 'headline' impact and all the negative emotions du jour, we may notice that things are not quite as bad as they appear.
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