NY futures advanced this week, with December gaining 142 points to close at 65.15 cents, while December'08 rallied 210 points to close at a new record of 75.10 cents.
After spending the previous twelve sessions in a relatively tight trading range, during which December closed no lower than 62.46 and no higher than 64.25 cents, the market finally broke out of this sideways pattern today in heavy volume of 29'600 futures and 21'700 options.
We believe that the driving force behind the market's renewed strength is the performance of December'08, which today settled at a record close of 75.10 cents, with the spread to spot December now stretched out to 995 points or 83 points a month.
In analyzing the relative performance between the two Decembers, it becomes evident that Dec'08 is taking over the leadership role.
During the previous two peaks on July 13 and September 27, the spread between spot and forward Dec measured only 510 points and 777 points, respectively. Today, as we have already mentioned, this difference stands at 995 points, reflecting almost full carry, which means that this band cannot stretch much further.
But who will be the stronger force in this tug-of-war, the near-term bearish outlook that many in the trade subscribe to or the longer term bullish scenario, which hedge funds are betting on?
December'08 has seen a lot of buying by hedge funds recently, as they see cotton as a laggard in a bullish macroeconomic environment for commodities, which is based on strong demand in emerging markets, inflationary pressures and a weakening dollar.
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