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CTH23 84.85 (+0.24)
CTK23 84.15 (+0.12)
CTN23 83.37 (+0.09)
CTZ23 80.25 (+0.15)
Zhengzhou WQF23 – 13,400 (+125)
Cotlook “A” Index – 99.10 (+1.60) – 30th November
Daily volume – 28,793
AWP – 74.61
Open interest – 194,776
Certificated stock – 8,901
H23 / K23 spread – (+0.70)
K23/N23 spread – (+0.78)
N23 / Z23 spread – (+3.12)
March Options Expiry – 10th February 2023
March 1st Notice Day – 22nd February 2023
– The front month H23 contract closed up for the third day in a row today, but it was far from a smooth ride. Having reached a high of 87.23 on the back of a far from outstanding export sales report (below), the market capitulated, losing over 350 points and looking all set for a down day until a late rally left us up 24 points on the day for a close at 84.85. We are bouncing around between either end of our trading range right now and finding it hard to settle on an outright direction. Within this range the market is proving itself to be pretty volatile and, whilst the human mind often looks to provide and explanation to events, we should be wary of attributing too significant a narrative to sudden sharp moves in either direction.
– Fed Chair Jerome Powell’s comments on Wednesday confirmed a slower pace of rate hikes and sparked optimism across markets. It is believed hedge funds are covering their short positions for a potential end of year rally. A speculator reportedly bought $36 million worth of out of the money 4,175 call options SPX (c/o) with a 30th December expiration. These short dated options may spark a frenzy of buying if the delta (which measures the degree to which an option is exposed to shifts in the price of the underlying asset) forces market makers into further buying.
– The USD has reacted to the news with two sharp downdays (following on from recent weakness) as can be seen from the chart below.
– In India arrivals of new crop are coming in at a disappointing pace. Whilst some participants are, of course, expressing concerns as to prospects for a smaller crop (and this should absolutely be monitored), more informed observers report that the farmer is holding back in the hope of higher prices.
– The attentive reader will recall that we reported a similar approach from the Turkish and Greek farmer in our weekend report and the even more attentive reader will recall that we consistently advise the spinning mill community against “kicking the can down the road” when unfixed on call sales are large and front month expiry looms. This situation represents the other side of the same coin as farmers wait and wait for a better price, until reality eventually forces them to capitulate and accept the price that the market is willing to pay.
– In Pakistan, mill capacities are shutting down by the day and there are no signs of yarn demand improving. LC’s are becoming an issue as banks are facing significant delays obtaining approval from the Central Bank to open import LC’s. The central bank is examining every LC over $100,000 for import due to scarcity of reserves. It is suggested that this will become more and more difficult moving forward unless inflows start to pour in.
– In China the NCMMS this week released its latest crop estimate of 6.138 MMT, compared to the USDA’s latest number of 6.096 MMT. A cold front has moved into northern China in the last week with temperatures in Xinjiang falling well below 0 degrees centigrade. Nevertheless, with the harvest progressing well any crop damage will more likely be at the margins.
– It seems that the market had been holding its breath for more cancellations in this week’s USDA export sales report as net sales of 16,500 bales for current crop and 11,000 bales for new crop were enough to spark an immediate rally of 175 points!! No one buyer stood out, with scattered purchases across 13 markets and net reductions of 8,500 bales for Turkey. Shipments for the week were reported at 139,500 bales.
– The CFTC cotton on call report, based positions for the week ending 25th November showed a reduction of 2,651 contracts to the net on call sales position for current crop. The total on call net sales position is 43,116 contracts which, as the eight highest position for this week of the year, does not seem overly burdensome right now.
The cotton market continues to find resistance below 90c/lb basis H23. We maintain that for H23 we see prices in the mid to high 80’s as fully valued and any move for this contract into the 90’s as an outright selling opportunity for the rest of the season ending 31st May 2023. Our bearish stance is based upon a lack of demand which will eventually be addressed by continued monthly WASDE reductions to world consumption. We would not want to be short Cotton long term under 70c/lb but feel a sideways market is likely for the rest of the 22/23 season, even if short term moves within this range may prove to be volatile!
*Please note that we only share CFTC CTO on weekend reports.
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