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Weekly: ICE Cotton Ends Higher On Short covering, Hopes Of Demand Revival; Experts Advise Options Trade

17 May 2020 4:18 pm
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Mumbai (Commodities Control) - ICE July cotton gained 198 points for the week ending May 15 to finish at 58.25 cents per lb. This positive closing comes as a surprise, because cotton had more bearish news than bullish to take it forward.

Cotton #2 moved higher despite bearish May WASDE report , firm US currency, weakness in equity markets, filing of bankruptcy global retailers like J.C. Penny, and a nearly 79% dip in US clothing sales in April Vs Mar.

On the economic front, additional 3 million Americans were reported to be unemployed. The cumulative total is nearly 36 million. Even this depressing fact won’t dim fiber’s spirit this week.

For the week ended 15th May, ICE cotton managed to settle on a positive note for 4th week in a row. July Cotton closed at 58.25 cents, up 40 points. October Cotton closed at 57.95 cents, up 49 points. July-October spread stands at inverted 125 points as compared with 110 points last week.

For the week between 11th and 15th May, ICE cotton continued its forward move, barring a negative closing mid-week. On Wednesday, Cotton contracts for July fell 88 points at 57.46 cents per lb, as investors booked profits and as caution set in about further demand from China.

Cotton rose to a near two-month high on Tuesday after a federal monthly demand and supply report projected an increase in U.S. exports and a revival in global demand hit by the coronavirus pandemic in 2020/21.

Globally, China is anticipated to import 9.5 million bales of cotton, which is up from their 2019/20 imports of 7.5 m bales. Global new crop carryout is estimated at 99.43 m bales – with China, India, and Brazil stocks combining for 80% of the World total.

Prices have risen more than 20% since hitting a low of 48.35 cents on April 1, driven by hopes of a pick-up in consumption, especially from top consumer China.

USDA reported strong weekly export sales, although sales were below the previous couple of weeks. China was a buyer once again. The United States Department of Agriculture's weekly export sales report showed net sales of 238,100 running bales for 2019/2020, down 36% from the previous week, but up 50% from the prior four-week average, primarily driven by China and Vietnam.

Experts see the world starting to slowly recover from the Coronavirus scare and some stores are starting to open again after being closed for weeks. The hope is that consumer demand for Cotton products will quickly return, but this is not likely to be the case. Consumers have really been hurt economically due to stay at home orders imposed here and overseas and it will take some time for them to recover.

On Friday, the cotton market did roll to negative price levels, but managed to return positive by closing session. The news of record bearish retails sales and the Trump Administration’s banning the Chinese technology giant Huawei from using U.S. software and certain semiconductor processes were two key bearish events for Friday’s trade, yet the market was able to slough them off.

USDA’s Cotton and Wool Outlook report suggests a 2% decline YoY in cotton production, while milling use is expected to increase 7% yr/yr (to a 3-yr high). The report stated exports will maintain an 85% of the use of new crop production, and U.S. will maintain a 37.5% share of the global export market.

According to CFTC data for the week ended 12th May, managed money slashed their net short position for 3rd straight week at 15,048 contracts down from 19,143 contracts from the week ended 5th May.

Meanwhile, open interest upped 1684 contracts at 230,508 contracts. Cotton speculative traders have been net short for 10 consecutive weeks.

Experts believe that the market is way too optimistic about the return of demand. Analysts see too much cotton in the World market for prices to sustain at the current levels.

While trading in futures, experts advise to avoid the July contract altogether, while using Put option and Put spread in December contract.

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