Mumbai (Commodities Control) – For ICE cotton futures the month of June has started on a great note. NY futures ended 420 points higher for the week ended 5th June, marking its best week since February 2018.
Last week the fibre closed the week with a 47 points drop, as greater part of the week was dictated by demand worries over simmering U.S-China tensions.
On 5th June, ICE cotton futures rose more than 3%. Cotton contracts for July ended 179 points higher at 61.79 cents per lb, helped by a positive federal jobs report that bolstered bets for an early economic recovery and in turn, demand for the natural fibre. It traded within a range of 59.75 and 62.32 cents a lb. October Cotton is at 61.08, up 154 points.
July-October spread stood at inverted 71 points vs 14 points last week.
The biggest support for cotton futures came through short covering and fresh buys on the charts. Managed money flipped to net long for the first time in 12 weeks. According to CFTC data for the week ended 2nd June, managed money’s net position is at 2,623 contracts long. Meanwhile, open interest upped 2265 contracts at 240,594 contracts.
For the week, 60 cents became a strong support and buying point. All in all, technical picture has been quite constructive for cotton, but fundamentals have been a mixed bag.
On Friday, The U.S. economy unexpectedly added jobs in May after suffering record losses in April, offering the clearest signal yet that a downturn triggered by the COVID-19 pandemic was probably over.
The report had several "green shoots" for apparel demand said Ed Jernigan, chief executive of Jernigan Global, a cotton textile supply chain manager.
But retailers are going to need some time to recover from the protests that have impacted the largest U.S. cities driving apparel demand, potentially reducing cotton uptake at retail by at least 750,000 bales this year, Jernigan added.
Going through the first 4 days of the glorious week, prices scaled an over two-month peak on Monday. Investors covered shorts, while dry weather in Texas, the largest cotton-producing state, provided further support.
However, experts say that market continues to face bearish fundamentals of slow demand and large supplies. Additionally, the riots across the nation are a huge negative for cotton.
Recently, U.S. cotton has also faced competition from cheaper fiber from Brazil and India.
Even heightened tensions between the U.S. and China dampened the outlook for demand and soured investor sentiment. It was reflected in Wednesday’s settlement prices; July futures were marginally up to close at 60.48 cents per lb.
Then for the first time through the week, cotton closed 48 points lower at 60 cents on Thursday, as weekly federal export report showed large cancellations, which outweighed sales, raising concerns over demand for the natural fibre.
In its weekly export sales report, the USDA showed net sales reductions of 10,100 running bales (RB) for the 2019/2020 marketing year for the period ending May 28. Exports were 237,900 RB, 16% below the prior 4-week average.
"There is not a lot of activity in either direction. There hasn't been a ton of pressure to sell or to buy, so the market is just staying comfortable and trading sideways," said Bailey Thomen, cotton risk management associate with INTL FCStone.
Market will watch, if China will stop fulfilling its obligations in the Phase One trade deal due to ramped up US rhetoric on the Chinese response to the Coronavirus epidemic and now the unrest in Hong Kong.
On a positive note, the world is starting to slowly recover from the Coronavirus scare and some stores are starting to open again after being closed for weeks. The retail demand has been slow to develop, as many consumers got hurt economically due to stay at home orders and have little disposable funds to spend on clothes.
Demand will slowly improve, but the industry should have plenty of supplies to work with in the short term.
Meanwhile in India, GoI has upped the minimum support price for kharif/Summer grown crops. MSP for Cotton has been increased by Rs 260 to Rs 5,515 per quintal. This is likely to ensure higher production of fibre.
Also, Cotton Corporation of India (CCI) has made a record procurement of 95 lakh bales of cotton across the country despite the disruption caused by the lockdown. This is much higher than last year’s procurement of 10.7 lakh bales and the previous high of 90 lakh bales in 2008.
Having said so, experts don’t rule out an insolvency crisis, which will be deflationary. They advise that in December contract, participants should take out some downside protection via the options market.
Support and Resistance for cotton #2 lies at 58.76 cents and 62.22 cents per lb, respectively.
(Commodities Control Bureau)
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