CTK23 79.16 (+0.05)
CTN23 79.70 (-0.11)
CTZ23 80.63 (-0.32)
Zhengzhou WQK23 – 14,025 (-270)
Cotlook “A” Index – 95.80 (+0.25) – 16th March
Daily volume – 37,785
AWP – 71.95
Open interest – 190,675
Certificated stock – 1,147
K23 / N23 spread – (-0.54)
N23 / Z23 spread – (-0.93)
May Options Expiry – 14th April 2023
May 1st Notice Day – 24th April 2023
Introduction
– Our title today quotes former UK Prime Minister Harold Macmillen who, when asked by a journalist to identify the greatest challenge to his administration, replied: “Events, dear boy, events”. This quote holds particular salience for EAP when we look back to our report of last Thursday where we wrote: “We have not seen a close above 86 since 31st January, nor have we seen a close below 81 since 4th January!!”
– This statement was certainly challenged by the events of the following days! First of all, Silicon Valley Bank collapsed sending ripples of concern throughout all markets and leading to a limit down close on Friday. Then, just as we thought we were out, Credit Suisse teetered on the bring of insolvency on Wednesday, only to be rescued by a loan from the Swiss Central Bank which soothed market fears without fully erasing them.
– These events have brought understandable macro concerns to all markets and cotton has broken the above mentioned, very short term, range. Having said that, we have repeated for some time now that the cotton market remains in a short term range between 77.50 and 89.92.
– Today the front month K23 tested, and defended well, the bottom of this range, hitting a low of 77.55, before rallying to close at 79.16.
– The coming days may bring more events that challenge this range but, for now, cotton remains within the range it has traded since 2nd November.
– As mentioned above, The Silicon Valley Bank collapse last week brought about concerns to the banking sector and led to a risk off sentiment across nearly all markets. The problems with Credit Suisse exacerbated this and highlighted a much larger systemic issue across the banking sector. Despite shifting the focus to Europe, U.S. banks are sitting on unrealised losses exceeding an eye watering $620 billion. Clearly highlighting the widening gap between the ‘large lenders’ position on bonds held and there realised value!
– The U.S Labour Statistics Department decreased the YoY CPI figure by 0.4% to 6% which was in line with expectations. The Producer Price Index was also 0.1% lower for the month of February against the markets expectations of a 0.3% increase! Positive data pushed the Dollar Basket up 1.1% and now currently trades at 104.05 with big resistance seen at 105.00.
– On Tuesday another COT report was released which gives traders positions as of 28th February when the May contract closed at 84.03. Funds and in particular Managed Money (MM) had not sold additional contracts following the massive sales the previous week. MM bought a net 6,244 to leave them net short 6,994 contracts. Non reportable bought 540 to leave them net long of 1553 whilst Other reportable sold a net 670 to leave them net long 5,051 contracts. Between MM, OR and NR their overall net position to just 390 contracts net short.
– We are 2 weeks behind where we should be in terms of reporting by the CFTC and another report is likely tomorrow and we expect few changes in that since prices were little changed over that period. The fact remains that funds are now in a position to move the market a lot if they have reason to do so and whilst we are quite sure their up to date position will show an overall short in the region of 10-15k overall short it is reason enough to not be overly bearish provided we are right and now that prices are under 80c/lb!
– Thanks as always to our friends at IAG for pictorial evidence of MM positions detailed below!
– The USDA export sales report for the week ending 9th March showed an improvement of sales upon last week, with total net sales of 225,500 bales for current crop. Sales were led by Vietnam which accounted for 120,200 bales of the total. Exports were on pace for a second week running at 273,900 bales.
– The CFTC cotton on call report based on positions as of 4th March showed good fixations on the way down which we believe will have been followed through earlier in the week. The net on call sales position reduced 5,872 contracts to 20,754 contracts. On the surface we would account this to the market weakness and, whilst this is undoubtably true, there is perhaps also a seasonal element. Last week the overall position was the 11th highest for the week of the year, whereas this week, despite the reduction in the net position, we now have the 14th highest position for the week of the year, which suggests that in previous years we have also seen heavy fixation drawdowns at this time.
Conclusion
Cotton has defended the wider 77.50 to 90.00 range we have been in since early November. Unfixed end users may choose to be scale down buyers of Cotton down to the long standing gap in the mid 70’s dating back to November. Above, we maintain that prices in the high 80’s has Cotton fully valued, with any move in to the 90’s to be considered a selling opportunity. We maintain that an anticipated relatively wide trading range of 75 to 95c/lb is likely to prevail to the end of the season ending May 31st.
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
Chris Williams
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