- Jo Earlam
- April 2, 2022
- 1:50 pm
- 10 min read
The end of the run or just a breather?
By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
John Maynard Keynes
CTK22 134.55 (-1.14)
CTN22 130.93 (-1.14)
CTZ22 110.68 (-0.60)
Zhengzhou CF205 – 21,725 (-30)
Cotlook “A” Index – 152.30 (-4.25)
Daily volume – 33,198
AWP – 130.89
Open interest – 227,162
Certificated stock – 144
May / July spread – (+3.62)
July / Dec spread – (+20.25)
May Options Expiry – 14th April 2022
May 1st Notice Day – 25th April 2022
Introduction
– Another week, another seasonal high. The market reached 141.80 on Monday at the start of what proved to be a volatile week. Friday’s loss of 114 points proved to be the smallest daily move with large up and down moves on a daily basis. Eventually, the market finished down for the week after failing to hold gains above the 140 mark (for now at least).
– As we have previously commented, spinning margins are uniformly negative, though many mills will have to fix their on call positions shortly which makes them a buyer of this market, however unpalatable they may find this.
– The CFTC Commitment of Traders report for positions dated 29th March showed the spec community (Managed Money, Other reportable and non-reportable categories) adding 8,751 contracts of length. As can be seen from the chart below, the money remains long but still has plenty of room to add length should they chose to.
– Taking a look at the macroeconomic landscape which is always key for better understanding commodities and markets in general. The latest non farm payrolls showed employment remained robust with advances of 431,000 jobs last month and unemployment fell to 3.6%. Strength in the dollar basket was seen towards the end of the week, finding support at around 97.70.
– However, treasury yields surged, with the 2 year rate exceeding the 30 year for the first time since 2007. This will likely cause the Fed to hike interest rates by 50 basis points in their May meeting to get ahead of this sensitive nearby yield . The inversion on the yield curve signals traders’ expectations that tightening will slow economic growth but cool inflation over time. Friendly to commodities short term.
– Mills may be helped by the GSCI roll period which will occur on the 5th through to the 9th business day of April. This means the index funds will roll from the front month (May’22) and into the July’22 contract. This rolling of futures may ‘help’ some mills fix their oncall exposure on the May contract. Again, the mills remain at the mercy of the funds who will often rail road the fundamentals. This is evident by the heightened volatility shown on front month price action. Mills should be warned of the dangers imposed by trying to fix near the expiry period.
– The market touched fresh highs of 141.80 basis the front month K22 on Monday. Statistically speaking (and taking a season from June 1st until May 31st, thereby ensuring that all futures months, Z, H, K, N, are of the same crop year), March is the second most common month for highs this century after June, which has passed.
– The market has recorded a seasonal high in March of five occasions this century. Of the remaining two months of the season we have seen one previous April high in the 2009/10 and two May highs which came consecutively in the 2016/17 and 2107/18 seasons.
– In isolation the statistics would seem to be hinting that we may have seen the high in the past week.
Conclusion
With the market breaking to the upside and making a new seasonal high, EAP believe that if at all possible a stand aside approach is the best policy noting that spinners margins do not reflect the Cotton spot price. For several months we have advised end users not to be exposed to unfixed “on call” purchases and maintain that viewpoint. However those end users who do have that exposure should either get out of harms way by fixing and use put option protection strategies against the downside risk!
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*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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