- Jo Earlam
- April 30, 2023
- 9:20 am
- 10 min read
There's little basis for a long position
Happiness– which is total and complete satisfaction with yourself. This means you realize that nothing and nobody else can make you happy. Happiness is something you get from yourself. If you’re completely satisfied with yourself, nobody can take it away from you.” – RZA
CTN23 80.80 (+0.40)
CTZ23 81.10 (+0.48)
CTH24 81.14 (+0.16)
Zhengzhou WQU23 – 15,370 (+95)
Cotlook “A” Index – 93.15 (+1.70)
Daily volume – 28,767
AWP – 70.82
Open interest – 171,926
Certificated stock – 75
N23 / Z23 spread – (-0.30)
Z23 / H24 spread – (-0.04)
July Options Expiry – 9th June 2023
July 1st Notice Day – 26th June 2023
Introduction
– Prices consolidated about the recent range in the last week trading between 77.68 and 81.81 being a 413 point range in average trading volume of 30,377 futures daily.
– It was a slightly quieter week in options where calls traded almost twice as actively as puts but volatility has dropped to almost the mid 20’s and the lowest level in over 18 months.
– The Brazilian crop continues to progress well and there seems to be much confidence of a record crop. We have spoken a lot recently about the impact aggressive old crop Brazilian offers are having on the basis of all growths at present. We should, perhaps, also give some consideration to what impact the coming crop may have on the 23/23 basis.
– With old crop stocks continuing to weigh on merchants, there is some hesitance on loading up on new crop positions (merchants, especially large ones, will still have internal, strategic, requirements to build a Brazilian position, but the enthusiasm for large positions will be lessened). As this season shows us (if we hadn’t already realised!), the days when Brazil was a niche, Southern Hemisphere crop have long gone. Brazil is now a major, year round, crop with the weight to impact the global basis.
– With this in mind, we have particular concern for some of the smaller machine picked growths, that often supply contamination free yarn demand looking for a discount to US. For example, Greek new crop is being offered at 700 on FOT, whilst Brazil can be picked up at 100 on FOB. Greek cotton often operates in its secure bubble, given the on hand demand from Turkey. However, Turkish consumption is still on the long road to recovery from the recent earthquakes and 400-500,000 MT of old crop domestic stocks remain in country. If the Turkish market cannot absorb the Greek crop, it will be forced to compete further afield. The costs from FOT Greece and FOB Brazil to COF FE are not too dissimilar, which shines a stark light on the difference in the offering basis. Being long the Greek basis does not seem a great trade today!
– The U.S. Economy managed a marginal gain for the first quarter of 2023 with GDP growth expanding by 1.1% in Q1. This was far below analyst estimates of 2.0% and a slowdown from last year. Nevertheless, the dollar found support from this and positive personal spending. Positive economic news bolsters the case for the Fed to continue their rate hikes. Gains of just 0.22% were capped by the stock market rally and strong resistance at 102.20. The index remains in a sharp downtrend (chart below) with the prior low a key level to hold.
– Weekly Commitment of Traders data showed managed money cotton traders were 20,298 contracts net short as of 4/25. That was a 13k contract stronger net short wk/wk, driven by net new selling. Commercial cotton traders reduced their net short by 15k contracts through the week to just 27,207 via a combination of new longs and fewer short hedges.
Conclusion
– EAP cannot rule out N23 making another attempt to fully fill the gap down to 74.85 and unfixed end users may choose to be scale down buyers of this contract from the high 70’s, down to the low 70’s were prices to get there. EAP expect a 75c to 85c/lb trading range to the end of the season ending 31st May with any moves outside of this range expected to be extremely short lived. For new crop, we would consider a scale down long from the mid 70’s only!
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Written by:
Jo Earlam
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