- Jo Earlam
- June 17, 2022
- 7:52 am
- 10 min read
Wall Street....... at least it's not as bad as crypto
If change is all you require, dwell not on the present or prior, imagine a view where everything is new and make that your only desire.
CTN22 143.53 (+0.35)
CTZ22 119.23 (+1.31)
CTH22 114.88 (+1.33)
Zhengzhou CF209 – 19,695 (-385)
Cotlook “A” Index – 161.30 (-2.25) – 15th June
Daily volume – 24,364
AWP – 134.41
Open interest – 199,231
Certificated stock – 1,087
July / Dec spread – (+24.30)
Dec / March spread – (+4.35)
July 1st Notice Day – 24th June 2022
September Options Expiry – 19th August 2022
December Options Expiry – 11th November 2022
December 1st Notice Day – 23rd November 2022
Introduction
– The front month Dec ’22 continues to struggle to find any momentum and it is hard to escape the feeling that it is only the soon to be expired July ’22 contract, supported by fixations, that stands between Dec and a larger sell off. Strong export sales to China (below) provided support to the market today, with Dec ’22 closing up 131 points at 143.53, though the wider demand picture is far from encouraging.
– As can be seen from the below charts, equities markets are having an ugly time of it. Some comfort was provided yesterday when the Fed increased rates 75 percentage points which was in line with expectations. Cotton traditionally correlates strongly to equities, though this relationship has notably broken down recently. If gravity does reassert itself however, the landing for cotton could be a hard one!
– In China domestic and CZCE prices continue to fall and there remains upwards of 2 million MT of Xinjiang cotton unsold. Xinjiang cotton is trading delivered east coast mills at 21,000 RMB/MT, whilst yarn is trading at 28,200 RMB/MT. As a rough estimate, this is slightly below break-even, but by no means catastrophic. However, demand is slow and both the cotton and yarn prices have been falling.
– Meanwhile, the fall in Chinese yarn prices is impacting demand for imported yarn from markets such as Vietnam. In addition to the fall in demand for cotton which this is bringing about we are also now seeing Vietnamese yarn being offered aggressively into non-traditional markets such as India and Bangladesh, competing with the locally produced yarn in these countries.
– As can be seen from the chart below, the Indian monsoon onset is slightly behind the normal pace but is making steady progress across the country. Sowing was a little delayed due to the late onset and, in certain areas, farmers have been advised to delay slightly in order to aid in pest management. So far there are no major concerns and, with a reduction in US supply this season, the market will be hoping it stays that way.
– The USDA export report showed a much more credible 26,500 bales for 2021/22 crop. We remain somewhat suspicious of the 380,200 bales for new crop of which 363,700 bales were to China, though there are circumstances, such as larger, long term “block” purchases that may occur at times regardless of the general market demand outlook, that could possibly explain this. Exports 335,800 bales continue to lag and it seems likely the USDA will require a downward revision to their 2021/22 target.
– The CFTC cotton on call report based positions on 10th June gave a good display of the support to N22 as 10,474 contracts were fixed over the course of the week. The N22 position now stands at 16,224 contracts. Reassuringly this has now dropped to the 3rd highest position for this time of year, but with 9 trading days from the report to the last day prior to FND there remain 1,803 contracts a day to be fixed!
Conclusion
We maintain that involvement in N22 is something one should by now have no part in, but for new crop December we maintain this contract is very fully valued above 125c/lb and the recent spike in N22 offered a golden opportunity to lock in a good proportion of new crop sales 25c/lb higher than one could get just 6 weeks ago. Any bounces in Z22 to 122c/lb up to 130c/lb were we to get them, should be sold in our humble opinion.
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*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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