Market Dodging Curve Balls and a Near TKO?
If the cotton market were a heavyweight fighter, the referee would have signaled a TKO this week. December futures suffered six consecutive days of losses. And going into the May 7 settlement, the cumulative loss was 292 points, about 3 cents.
Fundamental news was hard to come by. But demand, especially in a slowing of Chinese demand, was noted. The slower business was non-tariff related as mills cut back hours and yarn inventory began to build. While the demand deterioration is overall bearish, it relates to Chinese apparel sales to domestic customers – that is, a slowing of the Chinese economy. Unfortunately, more of this is expected and could potentially weigh heavy between now and December.
Weather problems had created planting difficulties across the U.S. cotton belt, but any bullish perspective from those events is long gone. On the contrary, supply fundamentals still conjure up bearish scenarios. Besides the China slowing, mills have caught up with immediate buying needs and are now sitting back hoping for lower prices. They will be quick to jump back in if the December price support holds or if the market begins to rally.
The 66-68 cent trading range remains in play with realistic attempts to stretch that range from 65.00 to 69.50. However, unlike two weeks ago, the bias is now downward. Near the weekly close, December was trading at 65.40, just 15 points above its life of contract low of 65.25 it established just three weeks ago (May 14).
The equity market has now seen a five-day rally and has essentially sucked all speculative funds into stocks and away from commodities. The anticipation of a lower interest rate announcement by the Fed has led this boost on Wall Street. It is not unusual to see commodities take a back seat when facing a rate reduction by the Fed. Thus, cotton is searching for bullish fundamentals with perhaps few to be found.
The bulls continue to point to ever-increasing imports of U.S. cotton by India. The world’s largest cotton producing country finds itself with a weather-reduced 2018-19 crop and is having to import cotton as the price of its dwindling domestic supplies increase almost daily. India will continue to buy U.S. cotton, and this will offer slight upward price support for New York.
Too, U.S. acreage is shrinking for various weather-related causes. As many as 60,000 acres in the Mid-South will fall under the category of “prevented plantings.” Of course, the Mid-South and Southwest will have sizeable insurance claims of failed acres.
However, for now, New York has turned its attention to an impending increase in Brazilian, Indian and U.S. 2019 production. Never mind the ever-declining condition of the Australian crop and its near disaster, the anticipated bumper crop in Brazil and its very nearby harvest will likely furnish mill needs until the U.S., India and other northern hemisphere harvests begin.
Declining demand, more so than a potential world record crop, is the crux of the weak market – a weak market that is giving every sign of growing weaker. The market has had several years’ worth of curve balls thrown at it just this year. It is not going to be able to hit them.
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