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Weekly: ICE Cotton Sees 1st Weekly Gain In Four; Record Shipments, China Stimulus Supports Amid Virus Concerns

9 Feb 2020 7:45 pm
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Mumbai (Commodities Control) – ICE Cotton upped 0.4% for the week, marking its first ever positive closing after 3 consecutive weekly declines. For the week ending 31st January, cotton contracts had lost 199 points.

Despite a gainful weekly close, cotton futures edged lower on Friday weighed by investors concern over the extent of corona virus' economic impact.

Cotton futures fell 16 to 26 points on Friday. March futures closed 29 points higher than last Friday. ICE March cotton settled down 16 points at 67.75 cents per lb. It traded within a range of 67.1 and 68 cents a lb. While May Cotton closed at 68.14, down 34 points. March-May spread stood at 39 points, down from last week’s spread at 81 points.

The market slipped below the anticipated trading range of 68-72 cents, as uncertainty about the extent of the corona virus contagion in China has been weighing on the market.

3rd February, beginning of the week, saw cotton futures sink to 1.5 months’ low following plunge in Chinese markets. March contract dipped 66 points to end at 66.84 cents on Lingering fears that the virus epidemic could dent Chinese economy. Tuesday came as breather where front month contracts upped 51-66 points and further month contracts gained over 100 points during closing session. Chinese stimulus boosted sentiments, as People’s Bank of China injected $242 bn through open markets. March cotton managed to settle at 67.35 cents after four sessions of decline.

The trend continued on 5th-6th February, when the active contract ended at 67.51 cents and 67.91 cents/lb, respectively. This rise in the mid-week is attributed to stronger equities and virus vaccine report. The Thursday announcement that China will halve tariffs of U.S. goods boosted cotton market sentiments. China reduced tariffs on more than 1.7K imported goods from the US, including soybeans. Elsewhere, the Cotton Association of India left its estimate of production unchanged at around 354 Lk bales.

Meanwhile, U.S December cotton exports reported 56.8% jump, on month, at 1.32 mn bales.

US net export sales against 2019/20 were off for the week ending Jan 30 Vs the previous sales period while shipments were a MY high at around 338, 000 and 425,000 running bales (RBs), respectively. The US is 83% committed and 35% shipped Vs the USDA’s export projection. Sales were again ahead of the average weekly pace required to meet the USDA’s 16.5 mn bale export target while shipments finally exceeded the pace requirement. China was not a net purchaser over the period.

However the cotton market suffered a sharp spill early in Friday’s session as traders, fearing the uncertainty of the weekend, liquidated. To that end, the market remains dominated by the Wuhan virus news, despite last week’s record cotton sales and this week’s record cotton shipments, plus a strong jobs data.

With most major cities in lockdown, life in China has basically come to a standstill and at this point it is still anyone’s guess as to when things might get back to normal again.

China has sealed off cities, canceled flights and closed factories to limit an epidemic roiling the world's second biggest economy to the alarm of global markets and businesses dependent on Chinese supply lines.

At the moment consumers are shopping less, tourists stay away and shipments in and out of China are being delayed. It is difficult to quantify this in terms of mill use and end-user consumption of cotton, but there will likely be a cut on both counts. Other markets like Vietnam, Bangladesh and Turkey may pick up some of the slack, which could give nearby demand a boost, but global mill use is likely going to struggle over time.

Also weighing on the cotton prices was a firmer dollar which climbed to a four-month high versus a basket of major currencies.

Similar to last week, speculators have relatively little directional exposure in the cotton market and so far they have remained on the sidelines.

There is good support in the cash market, but the technical picture has suffered some damage. However, speculators seem to give the market the benefit of the doubt and as long as the 200-day moving average holds, they may stay on the sidelines.

The upside is contained by the uncertainty about China and the fact that there are millions of bales of Indian high grades in the hands of the CCI, waiting to hit the market at slightly higher prices.

Commodities are currently taking a hit on demand fears. Market expects massive infrastructure spending in China and possibly in the US as well to provide strong support in the long run.

The weekly Commitment of Traders report from 4th February showed that cotton speculative traders were at a 33,435-contract net long. That was a weaker net long wk/wk, with 2,967 managed money longs closing their position. Managed money’s current net long is 8 consecutive weeks. Last week the managed money held their strongest net long for cotton since December 11th 2018. The open interest for the week ended 4th February stood at 292,759 contracts, down 22,559 contracts from the previous week.

Going forward, next week on Monday the market will see if Friday’s option expiration for the March contract resulted in any dynamic changes to open interest. Then on Tuesday, USDA will release its February Crop Report. Some participants are expecting that data to show reduced 2019 production, with possibly lower ending stocks. Thursday will have another round of exports-sales, and supposedly Saturday next week the NCC convention ends with the publication of their membership survey for 2020 acres. So, there remains a ton of data and time for the cotton market to consider.

As for cotton, considering the uncertainty about the virus situation, experts expect a slightly lower trading range of 66-70 cents in the foreseeable future.

(Commodities Control Bureau)

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