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NY futures rebound this week

14 May '10

6 min read

Macroeconomic developments are another factor that could weigh in on the bullish side of the equation. Last weekend the EU and the IMF took unprecedented measures to preempt an escalating sovereign debt crisis by announcing a rescue package of up to a trillion dollars! While it may be a noble intention to rescue the sinking European ship, we need to be cognizant of the fact that the funds for such a bailout do not exist and therefore have to either be borrowed or printed. Like the United States, Europe is now trying to solve its debt bubble by pumping more money into it. In our opinion it is only a matter of time until there is going to be a serious funding crisis that will result in higher interest rates and inflation. Under such a scenario nominal prices of tangible assets, such as commodities, are going to rise. It is no coincidence that gold, the only 'hard' currency left, has broken out to a new all-time high this week.

So where do we go from here? From a technical point of view the July and the December contracts have quite different appearances at the moment. While July has been forced back into its old sideways range dating back to late February and seems to go nowhere in a hurry, December looks quite strong and is within half a cent of a five-month high, with a chance to break out to the upside if it closes above 78.25 cents.

From a fundamental point of view the jury is still out on the July contract and much will depend on the fate of the certified stock. China holds the key in our opinion, because if we were to see strong imports from China over the coming weeks, the certified stock might disappear and trigger a short-covering rally. However, if China can somehow get by with its remaining stocks and a limited number of imports, then the certified stock may do its job and keep a lid on the market or even force prices lower as we head into the July notice period.

Although December looks quite strong at the moment, we believe that there will be strong resistance from grower selling over the coming weeks that will keep the upside contained. Near 80 cents we should see grower selling outweigh any mill buying, while the opposite would be the case if December were to slip towards 70 cents.

Plexus Cotton Limited

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