Weekly: ICE Cotton Marks Worst Weekly Performance In 8 Years; Options Trade Advised

The cotton market finished 682 points down on the month. The market completely ignored the exports-sales for the month.

US export sales were impressive, as another 441,600 RBs of Upland and Pima cotton were added last week. There were 23 markets participating in the buying; a sign that US cotton was attractively priced and that there aren’t many alternatives out there.

For the current season US export commitments stood at 14.5 million statistical bales, of which 7 million bales have been exported and 7.5 million bales remains to be exported but now there is a growing concern that some of these export sales might get cancelled if the economic situation worsens.

Weekly cotton bookings from USDA’s Export Sales report were 214,649 RBs on the week ending 20th February. That was 8.7% reduction wk/wk. However, cotton shipments from the same report were 324,084 RBs, which put accumulated cotton exports at 6.567 million RBs. That is 22.7% higher than last year’s pace.

New crop cotton bookings from the same week added 198,859 RBs, for a total of 1.483m RBs of new crop commitments. Cotton sales to China on the week were 39,559 RBs, which was 18.4% of the total sales, and broke the 3 week streak of negative sales. Cotton shipments to China were a 7-week low to 32,889 RBs.

The week set its negative tone from Monday, as Cotton futures fell 4% to touch more than 2-months low. Rapid rise in cases of a novel coronavirus outside China alarmed investors, dragging riskier assets lower. Cotton contracts for May settled down 144 points at 67.56 cents per lb, having earlier hit a low since Dec. 10 at 66 cents per lb. Commodities and the stock market futures slipped sharply as the COVID-19 virus spread in Iran, South Korea and Italy, triggering concerns about a global economic slowdown. Technically, May cotton fell below its 100-day average, on Monday, for the first time since October.

The bloodshed continued on Tuesday, as Cotton futures extended losses on sharp rise in the new coronavirus cases outside China. Cotton contracts for May slipped 126 points to settle at 66.70 cents per lb. May cotton closed for the 2nd straight day below the 100-day moving average, with the 20-day average having crossed over the 50-day to the downside. Wall Street added to losses after WHO stated the coronavirus was "a rapidly escalating epidemic." By Tuesday it was reported that beyond mainland China, the virus had spread to about 30 countries and territories. Tuesday’s appearance for the first time in both Austria and Croatia had made it a worldwide threat. The Centers for Disease Control (CDC) warned Americans to expect an outbreak in the U.S.

The downtrend carried to mid-week, when Cotton futures fell to a 2-1/2-month low on Wednesday. Front month cotton futures ended with more losses on Wednesday with contracts falling further by 78 to 115 points. May contract posted 5 consecutive red candles for a net loss of 433 points. The extent of economic hit remained unclear as the coronavirus spread further in South Korea and Italy, while Greece and Brazil reported their first cases of the virus.

Cotton futures slumped more than 4% on Thursday to their lowest level in over 4 months as fears about the economic impact of the spreading coronavirus dented risk sentiment among investors. Investors largely ignored the good fundamentals for cotton; riding the panic of coronavirus. Cotton contracts for May settled down 297 points at 62.5 cents per lb.

World Health Organization has upped its ante on coronavirus suggesting most countries on the planet will be infected. However, the U.S. has yet to have one fatality, and supposedly infections are going down in China.

"There is a lot of panic in all the other markets and that is influencing cotton," said Ed Jernigan, chief executive of Jernigan Global, a cotton textile supply chain manager.

"As the demand and consumption levels in China drop (due to the coronavirus outbreak), so will the level of imports. I think the market is attempting to adjust to that." The rapid spread of the coronavirus increased fears of a pandemic with six countries reporting their first cases.

The surge in virus cases rattled world stock markets, putting them on course for their largest weekly fall since the 2008 global financial crisis, while oil prices fell to their lowest in more than a year.

According to Market Analysts, the freefall in cotton will likely continue along with the slide in financial markets. The Governments and Central banks are expected to come to the rescue with fiscal stimulus.

The weekly Commitment of Traders report showed that managed money traders reduced their net long position by 9028 contracts to 22401 contracts for the week ending 25th Feb .For the week, managed money added 3773 contracts on the short side, while 5225 contracts were reduced on the long side there by reducing their net long position by 9028 contracts. The open interest for the week ended 25th February stood at 222,600 contracts, down 9928 contracts from the previous week.

Going forward, Monday will commence a new month and with that the market will see new supply-demand numbers on Tuesday, March 10. Some traders are looking for USDA to increase its domestic exports category. Additionally, the market will be keen on the month’s forthcoming exports-sales reports. The general thought is once the Dow calms, the cotton market may very well experience a comeback from its oversold status.

Experts, thus, strongly advise to trade in options until the volatile environment settles.

Support and Resistance for Cotton #2 lies at 58.89 cents and 64.07 cents/lb, respectively.

(Commodities Control Bureau)