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CTH23 82.17 (+3.53)
CTK23 82.00 (+3.15)
CTN23 81.16 (+2.44)
CTZ23 77.26 (+1.38)
Zhengzhou WQF23 – 12,935 (+45)
Cotlook “A” Index – 92.20 (+3.00) – 2nd November
Daily volume – 75,109
AWP – 68.95
Open interest – 251,742
Certificated stock – 880
Z22 / H23 spread – (+0.83)
Z22 / Z23 spread – (+5.74)
December Options Expiry – 11th November 2022
December 1st Notice Day – 23rd November 2022
– Following weeks of bearish price action, the market has certainly rebounded so far this week with three days out of four seeing limit up moves – including the options market being locked limit synthetically on Tuesday. The market closed today at 83.00 basis the Dec ’22, 1089 points over Friday’s close. If this is a dead cat bounce then it would appear to be a lion!!
– Having said that, by Friday the market was in oversold status and the specs were most likely flat. Therefore, there has been a dearth of market actors needing or wanting to sell this rally, giving it a resistance free ride to the upside.
– One explanation for the positive start to the week across all markets was the stories that China may soon move to roll back the zero covid policies which have acted as such a drag on the country’s economic performance (not to mention people’s lives!). This hope seems to have been inspired by the approval of an inhalable vaccine which would hopefully increase take up rates amongst the population. To put this in context however, at the time of this soaring optimism, Foxconn’s Zhengzhou factory was being placed into full lockdown and authorities in Shanghai were pursuing thousands of people for testing and potential quarantine, after one guest at Shanghai Disneyland reported positive. Even if we are to see a, welcome, move away from this policy, normality is only likely to be at the end of a long road.
– In India the new crop is beginning to move and we are seeing some signs of positivity in the market. Farmers are asking for Rs. 10,000/quintal, whilst the gins are at Rs. 8,000/quintal. Because of this disparity, farmers are holding back to a degree and the pace of arrivals is behind last season, but cotton is moving and ginning is underway.
– At these levels, the break even for gins is around Rs. 65,000/candy, mills are below these levels and a little business is being transacted between Rs. 64,000 and Rs. 64,500/candy. However, the bulk of the business recently has being taken by international merchants who have been pricing their offers basis ICE and selling in the low 60,000’s.
– At these levels the fine count mills are breaking even to a small positive margin and the outlook for consumption is positive. Coarse count mills remain under water at these levels and still need to see some improvement.
– Whilst much focus has, understandably, been on the Z/H spread the H/K spread briefly returned to a small carry in recent days.
– The USDA export sales report for the week ending 27th October finally saw a new #1 buyer, ending Pakistan’s long run at the top. China bought 122,000 bales out of a net total of 191,800 bales for current crop with many reports putting this as related to the expiry of quotas rather than significant consumptive demand. New crop sales were markedly low at 11,200 bales. Shipments totalled 119,000 bales for the week.
– The CFTC cotton on call report, based positions for the week ending 28th October showed further reductions in the net on call sales positions. As with last week, the major reductions seemed to come from outright fixations in the Dec, rather than rolls to the March. Net on call sales were reduced 4,004 contracts, with 2,216 contracts of this reduction in the Dec. The March position was essentially unchanged, whilst, interestingly, July was reduced 1,075 contracts.
The cotton market has found support at the long term 70c level suggested in the weekend report and recent spec shorts have almost certainly being forced to readdress their standpoint. Fundamentally the market looks more than fully valued to us in the low 80s and judging by how often our phones and others have been ringing for physical cotton this week in the face of 3 limit up moves we strongly suspect that it should not be a surprise to see the market capitulate to the downside as we approach Z22 expiry a week from tomorrow!
*Please note that we only share CFTC CTO on weekend reports.
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