Market Report

Thursday Cotton Bullets – 20/01/2023

La Nina transition may be too late for Texas

CTH23 83.39 (-1.42)
CTK23 83.86 (-1.32)
CTN23 84.18 (-1.22)
CTZ23 82.32 (-0.88)

Zhengzhou WQK23 – 14,785 (+200)

Cotlook “A” Index – 98.60 (+0.50) – 18th January

Daily volume – 34,631
AWP – 74.68
Open interest – 202,359
Certificated stock – 8,900

H23 / K23 spread – (-0.47)
K23 / N23 spread – (-0.32)
N23 / Z23 spread – (+1.86)

March Options Expiry – 10th February 2023
March 1st Notice Day – 22nd February 2023

Introduction

– It is very hard not to repeat our introduction of a week ago when we stated, “Cotton continues to trade its range going back to the beginning of November and would seem to need a change of circumstance to break us out of it,” as it continues to ring true. At one point yesterday the market was up 348 points causing much excitement. However, the eventual close was up 199 pts and today the lead month H23 today gave back 142 pts of this move to close at 83.39. In other words, not much seems to have changed!

– Any explanation of a daily upwards move in the market these days tends to reference the “China reopening story”. This opinion was given a boost on Tuesday by China’s data release; Q4 GDP was reported at 2.9% against the expected 1.8% whilst retail sales dropped 1.8%, a fantastic performance considering the expectation was for a drop in excess of 8%. Nevertheless, in many quarters the veracity of this data is being treated with a healthy does of scepticism.
– In the US, however, retail sales disappointed to the down side for December, falling 1.1% year on year, against expectations of a 0.9% fall. This will not have helped retailers deal with their burdensome stocks (which we commented on in our weekend report) and is likely to continue to act on as a drag on spinning mill orders.
– For the last 3 years the world’s climate has been in a La Nina situation. This has driven many of the weather conditions that have impacted the market; notably, drought in Texas, flooding in Pakistan and plentiful rains in Australia.
– This length of time is, historically, an unusually long La Nina occurrence and the expectation is for the world to move into a more neutral state over the course of 2023 (sometimes referred to as La Nada) before later transitioning into El Nino.
– Having said that, according to forecasts, this transition is unlikely to be completed until late in the year. Whilst this weakening is likely to lessen (though not remove) the risk of events such as this year’s flooding in Pakistan, it is predicted to be too late to break the Texas drought in time for the 2023/24 crop.

– The USDA export sales report will be released tomorrow due to the MLK holiday earlier this week.
– The CFTC cotton on call report, based positions on 13th January showed the net on call sales position for current crop continue to draw down at a steady pace as the sideways market puts the mills under little pressure. The net position for current crop stands at 34,456 contracts, which is the 11th highest position for this week of the year out of 22 years of records.

Conclusion

The cotton market has found resistance just under 90c/lb basis H23. We maintain that for H23 we see prices in the high 80’s as fully valued and, for now, see any move for this contract into the low 90’s as a selling opportunity. The market remains plagued by a lack of demand though pockets of improvement are to be found in certain parts of the world. A tightening of supply, notably in India, prompts us to raise our downside ideas to the mid to high 70s.

Useful links

*Please note that we only share CFTC CTO on weekend reports. 

Written by:

Jo Earlam

Jo Earlam

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