Cotton Weekly: Surprise Bull Run Comes To An End; However Just For A Breather

MUMBAI(Commoditiescontrol): Cotton market concluded the week with US market retreating to 79 cents on major speculative liquidation. However, the market has taken a temporary breather as another bull run could likely be expected.

US MARKET:

Astonishing upsurge came to an end on the ICE futures market as sluggish export sales amid expectation of cancellation during the week retreated prices to 79 cents level previously seen on May 11.

Picking off from last Friday, the bull run persisted to finally reach a three year high at 87.18 cents/lb surging 1,101 points in three trade sessions. It rallied to hit a “synthetic” high of 88.40 cents hit via options on Monday when futures locked limit up at 87.18 cents.

However, export cancellations this week and sluggish weekly export sales which plunged 22.4 percent to 127,200 Running Bales(RB) for the week ended May 11, pulled back prices to 79.24 cents/lb, wiping off 794 points nearly three fourth of the prodigious bull run surge on Thursday.

Another quick pivot was observed where the bull turned bear as open interest declined 9.41 percent to 118,940 lots (12.3 million 480lb bales) on Thursday as speculator liquidated their long position in the market booking profits from higher levels.

However, speculators were not the only one who took opportunity of upsurge, some merchants who previously had preferred to export their stocks, bought back their stocks and added them on the futures exchange which created supply pressure on the futures exchange as the certified stocks rose 25.9 percent or 82,866 bales to 402,998 bales of 480lb each as of May 19 from 320,132 bales on May 11.

“We heard of several hundred thousand bales of this ‘arbitrage’ being done, which was enough to cap the market,’’ said Peter Egli in a weekly cotton market report.

But, merchants may likely short cover their position on the future exchange and once again prefer to sell their stocks on the export market considering that prices have retreated to 79 cents/lb.

The bull has not completed faded as biggest supporting factor is the unfixed-on call commitments. As of May 11, July on call position decreased 4,960 lots to 41,255 lots (4.13 million 480lb bales), new crop December’s rose 1,235 to 32,437 lots (3.24 million bales). Some, mills may have likely fixed their position on when prices were at 76.14 cents and then rose to settle at 79.18 cents on May 11. Further, the first notice day of July is just 5 weeks away, so the market will likely remain highly volatile in the coming weeks with support placed at 78 cents and 75 cents.

The inverted July-December intercrop straddle settled to 600 points at 73.45 cents/lb narrowing down from 1,203 points on Monday.




CHINA MARKET:

The ZCE cotton futures surged early in the week to hit a 10 week high at 16,240 yuan/tonne on May 16 however pivoted on major long liquidation.|

The benchmark September contract surged sharply 1,090 points to hit 10 week high at 16,540 yuan/tonne in speculative trade tracking the upsurge on the US ICE futures, however it quickly gave up gains and settled at 16,240 yuan/ton on Tuesday.

Speculators soon liquidated their long position booking profits from higher levels as prices plunged 695 points, in three successive trade sessions, to settle at 15,845 yuan on Friday.

Open interest majorly dropped for four out of the five trading sessions to 212,912 lots, down 12 percent over the week. However, prices were higher 3.2 percent indicating major short covering.




Meanwhile, the State Reserve Auction demonstrates its second best weekly performance since commencement with total sales for the week ended May 19 were at 125,155 tonnes out of the total offered quantity at 149,822 tonnes touching a total weekly turnover at 84 percent. As of May 19, around 1,163,959 tons (68.46 lakh 170 kg bales) were sold from the total offered quantity of 1,602,805 tons (94.28 lakh bales). (Full Report)

INDIAN MARKET:

The Indian cotton futures market witnessed heavy profit booking to settle at Rs 20,940/bale after May surged to hit a 3-week high on Monday.

The MCX May surged 950 points in a matter of three trade session to hit a 3 week high at Rs 21,500/bale on Monday tracking the splendid rally on US ICE futures. However, speculators used the opportunity to book profits from higher levels as it lost nearly three-fourth of the prodigious surge, dropping 600 points to Rs 20,900/bale. Open Interest dropped more than 28 percent to 85,025 bales in over a week.

Surprisingly, June’s open interest showed growth as it increased 28 percent to 1.04 lakh bales during the same period amid 0.4 percent rise decline in price at Rs 21,140/bale indicating additional short positions amid rolling over from May to June.

Technically, the June contract is above the Daily Reversal Value (DRV) at Rs 20,755 with resistance placed at Rs 21,320, Rs 21,520 and Rs 21,780. If the market breaches Rs 21,780 level then upsurge could likely continue.

However, Bandwidth is showing a downtrend therefore expect contraction and sideways movement with volatility. Lower range could get support at Rs 20,940-20,650 unless the market decisively falls to Rs 20,650 on closing. Traders long and holding the same can maintain the stop loss at Rs 20,650.




DOMESTIC SPOT MARKET:

Tracking global cues, the spot market snapped from a three-week bear and surged sharply early in the week followed by minor losses to end marginally higher 1.6 percent on average ranging between Rs 34,000-44,600/candy.




The Gujarat Shankar 6, 30mm cotton surged 2 percent or Rs 890 to Rs 43,810 /candy compared to Rs 42,920/candy in the last week. Meanwhile, the Maharashtra 30mm rose 1.8 percent or Rs 760 to average at Rs 43,590/candy from Rs 42,830/candy in the previous week.

There was no fundamental factor which supported the upsurge but major influence from the US cotton market which touched nearly three year high on Monday.

The upsurge resulted in sellers deciding to restrict their trade activity in anticipation of achieving higher prices for their limited volume of stored lint. Some sellers in Lower Rajasthan were quoting higher price of Rs 45,000/candy(30mm+) over and above the prevailing market rates.

However, observing the higher asking rates, the local mills who were previous active purchasing on a hand to mouth basis also turned to the sidelines leading to a devoid market activity throughout the week.

The bull run which wreaked havoc in the market failed to extend the uptrend as prices gradually began to trend downward losing nearly Rs 750/candy on average on lack of supportive factor.

On the arrival side, as per the data collated from market sources, arrivals for the week (May 15-19) declined 10 percent to 2.03 lakh bales from 2.26 lakh bales in the prior week (May 8-12) with the average daily arrivals falling to 40,000 from 45,000 bales. Arrivals will gradually decline as farmers were vacating their inventories in preparation for next season crop.

Crop planting has already begun in North India with nearly 70 percent at 2.8 lakh hectare from estimated target area at 4 lakh area in Punjab completed as of May 13. Similarly, Haryana has sown 60 percent at 3.81 lakh hectare from estimated target area 6.35 lakh hectare. (Full Report)

Conclusion:

The Indian market was entirely influenced by the trend on the US market for the week ended May 19. Fundamentally, bearish factors, such as rise in 2017-18 production estimates ranging between 350-360 lakh 170kg bales amid increase in sowing acreage, expectation of good monsoon season and higher imports, has an edge over any existing bull factors which in turn is limiting uptrend on the market.

Further, higher unsold superior lint in the market was questionable as sellers continued to withhold with a mindset of offloading as monsoon gradually arrives in the country. Despite the bull run, spot prices failed to breach the first spot resistance placed at Rs 44,500/candy which could imply that higher levels are just an temporary affair and must be used to book profits as the opportunity arises.

Meanwhile, India cancelled 46,465 bales of 170kg of US cotton previously committed due to recent price surge on ICE futures.

The market is on a phase of wait and watch awaiting fresh cues to guide the consolidated trend.

(By Commoditiescontrol Bureau; +91-22-40015534)