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Weekly: NY Cotton Marks First Weekly Drop after Three Straight Gains amid Surging Covid Cases, U.S Elections Uncertainty; Experts Foresee Volatile Trade Ahead

2 Nov 2020 8:04 am
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Mumbai (Commodities Control) – NY Cotton ended the week on the negative side of the scale; down 209 points or 2.91% for March’21 futures and 237 points or 3.3% for December ‘20 futures.

This happens to be the first weekly decline after 3 consecutive weeks of gain. For the week-ended 23rd October, the fibre ended 1.86% or 131 points higher for March’21 futures on ICE, while December Futures settled 1.96% or 137 points higher. For the week ended 16th October, the most-active ICE cotton futures jumped 3.13% higher.

On Friday, ICE cotton futures was down the most, as surging coronavirus cases fueled demand worries and U.S. election uncertainty added further pressure.

The cotton contract for December 20 closed at 68.92 cents, down 90 points and March 21 Cotton closed at 69.78 cents, down 102 points. Dec’20-Mar’21 futures stood at 86 points vs 58 points last week.

Technically speaking, Cotton speculative traders were net buyers on the week ending 27th October. CFTC data showed managed money’s net long increased 5,006 contracts to 70,201 contracts on 20th October. This is the result of addition to the long side positions by 5,298 contracts. However it is to be noted that short side positions added 292 contracts for the first time since the week ended 29th September. The open interest upped to 302,792 contracts.

"The upcoming elections and the new spike in COVID cases are adding some pressure on the market. Investors are getting a little bit nervous ahead of everything and are pulling back," said Bailey Thomen, cotton risk management associate with StoneX Group.

The United States broke its single-day record for new coronavirus cases, while Europe also struggled under its grip, stoking concerns of renewed restrictions and muted economic activity that crashed cotton prices earlier this year.

Market participants were also wary of next week's U.S. Presidential election with fears that the result will not be clear on Tuesday night.

A contested election would add some volatility and fear to the market and could keep prices down, Thomen added.

Having said so, the natural fiber had climbed close to a 1.5 year peak at the beginning of the week on concerns over adverse weather. The cotton contract for December closed at 72.11 cents, up 82 points on Monday. The front-month contract hit its highest since May 7, 2019 at 72.35 cents, while March 21 Cotton closed at 72.72 cents, up 85 points.

The U.S. Department of Agriculture's weekly crop progress data on Monday showed that 42% of cotton was harvested as of the week ended Oct. 25 and 40% of cotton was in good/excellent condition.

It was on Wednesday that the cotton market suffered a steep setback, when the fibre shed triple digits by the closing session, as a combination of election and COVID-19 jitters sent most markets sharply lower.

Similarly, ICE cotton futures fell to a near two-week low on Thursday, hurt by a stronger dollar and as rising coronavirus cases re-ignited demand worries, even as U.S. crop damage concerns due to Storm Zeta persisted. The cotton contract for December closed at 69.82 cents, down 35 points and March 21 Cotton closed at 70.8 cents, down 23 points.

Cotton #2 slid despite positive weekly export sales data. The U.S. Department of Agriculture's weekly export sales report showed net sales of 288,700 running bales for 2020/21 were up 27% from the previous week, while exports rose 18% for the period ended Oct. 22. The sales were 105% higher yr/yr. Sales to the PRC were 28% of the total with 81,394 RBs.

"This week shows us how volatile and uncertain this market is. It shows that even with crop concerns and with good export numbers, demand side uncertainties can bring prices down," Don Shurley, professor emeritus of cotton economics at University of Georgia wrote in a note.

Experts add that prices can still work back higher, but it will take that smaller crop, renewed optimism and confidence on the demand side.

On Monday afternoon, USDA will issue its latest harvest updates. As it stands, the 2020 harvest is pretty much on its historical schedule, but given the harsh weather conditions, producers want to finish their tasks sooner than later. In the last report, the crop was about 43% harvested.

As the market enters the month of November, its underlying fundamental drivers will be COVID-19 and the continuing harvest. COVID-19 infections have been on the rise, with the U.S. posting a record high day on Thursday. This situation could cause more restrictions on the U.S. economy.

Not to forget, next Tuesday is the presidential election, which means some traders will remain sidelined until that event is basically determined.

Analysts note that the next 10 days will likely be quite volatile, because of the US elections, the index fund roll, December fixations, options expiration and WASDE report. All that with speculative longs and trade shorts sitting on their largest positions in two years.

Experts, thus, advise to use options only to operate in the current environment.

Meanwhile, Indian cotton prices were affected due to weakness in global markets week. Major cotton mandis in India reported steady-to-weak prices amid weak mill buying as new crop arrivals are expected to rise, hereon. Cotton prices were generally unchanged in Maharashtra and M.P mandis throughout the week.

Support and Resistance for Cotton #2 March' 21 futures lies at 68.42 cents and 71.64 cents per lb, respectively.

(Commodities Control Bureau)

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