CTZ22 96.13 (+1.51)
CTH23 93.80 (+1.47)
CTK23 92.35 (+1.51)
Zhengzhou CF301 – 13,730 (-160)
Cotlook “A” Index – 113.10 (+0.24)
Daily volume – 15,669
AWP – 89.44
Open interest – 187,179
Certificated stock – 4,552
Z22/H23 spread – (+2.33)
Z22/Z23 spread – (+13.16)
September Options Expiry – 19th August 2022
December Options Expiry – 11th November 2022
December 1st Notice Day – 23rd November 2022
Introduction
– The 592 point trading range of the week was an inside week, meaning it was within the range of the previous week with a low of 91.60 and high of 97.52 basis CTZ22. Volume was typically low for this time of the year, averaging 19,202 daily and options averaged just 4,552 with call buying outnumbering puts by nearly 2 to 1.
– Option implied at the money volatility in Z22 continues to drift lower and at 39.49%, is a 2.5% lower over the week. Another week like the one past and we can expect volatility to fall to the mid 30’s rather quickly!
– The CFTC COT report after the close and showing traders positions as of last Tuesday showed that Managed Money (MM) were sellers for the 7th consecutive week. Other and Non Reportables were also small net sellers and between MM, OR and NR their overall net position is down to 36,641 net long.
– Shipping giant AP Moller-Maersk this week lifted their profit guidance and predicted that the global supply chain disruption would take longer than expected to return to normal. Maersk predicted that a gradual normalisation of freight rates would begin in the fourth quarter of the year. Merchants will, of course, seek to pass this cost on via an elevated basis as they have done to date. However, given the poor demand outlook we expect the basis to come under pressure and merchants will be at risk of continuing high freight costs eating into their margins.
– Oil’s strength (despite recent consolidation) has been much publicised over recent months. Oil is, of course, the raw material for most of cotton’s competing fibres. Whilst there is no perfect indicator market for man made fibres, the CZCE PTA market is perhaps the best proxy. The below monthly PTA chart shows that, whilst prices enjoyed something of a bounce on the back of oil strength they still remain at a historically competitive level. Cotton on the other hand, though down from recent highs, still remains towards the high end of what one would consider “normal” prices.
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We have spoken at length in our reports to the current poor demand situation for cotton which, we believe, is ultimately driven by a worsening macro economic situation. Cotton is, in general, a preferred fibre, when the consumer is confident they will look to cotton ahead of man made fibres as a fibre of choice (athleisure being a notable exception), but when times are tough price will take over as a driving factor. The continuing price disparity between cotton and MMFs is a further concern for current cotton demand.
Conclusion
Prices have held the recent 82.54 low and a counter trend bounce has occurred which could take prices as high as the low 100’s but is expected by EAP to fail. Potentially, a test of the 200 day moving average is possible fuelled by some courageous end user physical buying and/or a hurricane inspired series of events. However, EAP maintain our longer term viewpoint that a final move to the 70’s will eventually play out by next May and the 22/23 season will prove to be an inverted season.
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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