Cotton Weekly: Fireworks In US Market On Friday Pivoted The Bear Into Bull

MUMBAI(Commoditiescontrol)– US cotton futures breached the key resistance level of 80 cents on expectation of lower 2016-17 ending stock heavily impacting market sentiment on Friday.

Let’s first look at how the global market faired throughout the week ended May 13 in detail.

US MARKET:

An astonishing 601 points surge, from 1 month low at 76.17 cents, at the end of the week on expectation of lower 2016-17 ending stock and revised export figures led to ICE cotton July futures breaching the key resistance level of 80 cents and touching a near 3 year high at 82.18 cents on Friday.

The US market was trading on the bearish side for the first three days of the week to hit a month low at 76.36 cents/lb on Wednesday after USDA forecasts rise in production of major producing countries with US leading the way by 11 percent to 19.2 million 480lb bales. (Full Report)

However, the market focus pivoted quickly on the USDA Export Sales report on Thursday which showed a modest rise of 6 percent to 163,900 Running Bales(RB) from prior week’s 154,000 RB. (Full Report)

The effect of the report was a jump of 3.52 percent in settlement price at 79.17 cents/lb on Thursday. However, the bull did not cease as on the market witnessed fireworks on Friday with prices surging 601 points intraday to touch a near 3 year high at 82.18 cents/lb.

Volume jumped 84 percent intraday to a massive 64,612 lots in July contract however it declined 38 percent on Friday to 26,885 lots. Total market volume estimated at a still-heavy 55,638 lots on Friday, though down from a massive 67,317 lots the previous session.

Expectation of lower 2016-17 ending stock which as per May’s revision WASDE estimates declined to 3.2 million 480lb bales from 3.7 million bales. Exports were revised to a higher of 14.5 million 480lb bales, which as of week ended May 4 has been surpassed at an estimated figure of 14.51 million bales reported USDA in its Weekly Export Sales report on Thursday.

Meanwhile, the higher unfixed on call commitments was the other bull factor reigning in the market. As of May 4, July on call position increased 831 lots to 46,215 lots (4.622 million 480lb bales), December’s rose 1,431 to 31,202 lots (3.12 million bales).

The total open interest in July as of May 12 was at 131,294 lots (13.67 million 480lb bales) from which the trade shorts were the large unfixed on call committed traders.

However, this week there might have been some mill fixation which added to the bull rally pushing prices to 82.18 cents on Friday from 76.17 cents.

The inverted July-December intercrop straddle settled on a new high premium of 846 points with December closing at 73.72 cents, up 112 point from prior session.

The present situation in the market exhibits the 2016-17 crop position in focus than the 2017-18 estimates of the WASDE report. With prices breaching the key resistance level of 80 cents to 82.18 cents, there is a potential of the market powering through the 85 cents/lb. The entire game depends on how the long positioned speculators and trade shorts play out in the days ahead, with the sentiment favoring the bulls.




CHINA MARKET:

The ZCE cotton future was under major liquidation as prices declined 2.3 percent over the week as speculators sold off their long position.

The benchmark September contract, on Thursday, fell to the lowest price at Rs 15,380 yuan/tonne seen since April 7.

Minor short covering snapped prices from 5 session losing streak to settle marginally higher 0.9 percent or 135 yuan at 15,625 yuan/tonne on Friday. As of May 11, open interest dropped nearly 23 percent to 2.42 lakh lots from 3.14 lakh lots.

The pace of the State Reserve Auction sales was gradually slowing down as the total sales for the week ended May 12 touched 88,938 tonnes with the daily average sales declining 11.2 percent at 17,788 tonnes from prior week’s 20,038 tonnes. As of May 12, around 1,037,535 tons (61.03 lakh 170 kg bales) were sold from the total offered quantity of 1,452,983 tons (85.47 lakh bales). (Full Report)




INDIAN MARKET:

The Indian cotton futures market was under consolidation, trading in a tight 200 point range for the most part of the week ended May 13, with a surprise surge of 450 points on Friday tracking the splendid two day rally of 601 points on the ICE futures.

The MCX May traded in a tight range of 310 points from May 2 to May 11 in the price band of Rs 20,490-Rs 20,750/bale. However, the splendid rally on the ICE futures broke the dull movement in the market as prices leaped up Rs 480 to touch nearly 3 week high to Rs 21,170/bale on Friday.

Volume on Friday jumped crossing 5,000 level to 5,197 lots, which was higest since first week of March. There was a lot of intraday speculative trade with probability of immediate sell off as open interest declined sharply 14 percent at the end of the trade to 4,741 lots from prior session’s 5,513 lots.

However, the open interest in July increased nearly 11 percent to 3,236 lots amid 1.6 percent rise in price to Rs 21,230/bale from prior session.

The bull seems temporary as various bearish factors in the domestic market may limit upside. But, if the market continued to take cues from ICE futures then the bull trend could likely be carried over at the beginning of the next week.

Technically, an engulfing bull candle on Friday suggested an upside bias with higher range to be tested at Rs 21,313-22,003. Weaker opening and correction at the beginning of the week to Rs 20,897-20,623 can be used for buying or accumulation with a stop loss of Rs 20,420. Bandwidth is falling therefore upside could still be capped to 21,190-21,313 zone.

If the market breaches 21,313 then rally could likely continue in the days ahead. We recommend, selling on every rise for next week.



DOMESTIC SPOT MARKET:

Third consecutive weak trade extends bearish trend on the spot market as prices fell by Rs 200 to nearly Rs 1000/candy on an average across major markets with the price band of Rs 32,500-44,100/candy.




Major decline was observed in the North Indian market where prices plunged Rs 750-870/candy averaging Rs 43,300-44,100/candy(4,540-4,620/maund).

Meanwhile, prices marginally fell in Central India with the Maharashtra 30mm prices down 0.5 percent or Rs 220 to average at Rs 42,830/candy from Rs 43,050/candy in the previous week.The Gujarat Shankar 6 30mm cotton was tad lower 0.3 percent or Rs 150 to Rs 42,920/candy compared to Rs 43,060/candy in the last week.

Physical trade extended lethargy with the wonted small lot deals changing hands during the week mainly focused for the 28mm stock in Maharashtra. Sellers suppressed offloading superior quality lint at the buyers’ bidding price and persistently quoted higher rates which led to fragmented trade.

On the other hand, enquiries for the furdar quality(22-26mm) was gradually slowing down which in the prior weeks was the stand out amongst all other varieties of cotton where MNCs were procuring to meet export demand. The furdar quality stock ruled in the price band of Rs 32,500-34,000/candy across major markets.

On the arrival side, as per the data collated from market sources, arrivals for the week (May 8-12) declined marginally 9 percent to 2.26 lakh bales from 2.48 lakh bales in the prior week (May 2-6) with the average daily arrivals falling to 0.45 lakh bales from 0.50 lakh bales.

Farmers were gearing up for sowing next season crop in their fields beginning from North India where sowing has already begun with nearly 40-50 percent of the total target area planted as of May 12. Sowing acreage is expected to increase significantly in 2017-18 as producers received lucrative prices ranging between Rs 5,200-6,300/quintal compared to the minimum support price (MSP) for 2016-17 ranging between Rs 3,800(Medium Staple) to Rs 4,160(Long Staple).

India’s 2017-18 cotton area is forecast to rise 7 percent to 11.3 million hectares as per the International Cotton Advisory Committee (ICAC). With rise in cotton area, production is likely to increase provided weather conditions remain favorable during the monsoon season. ICAC estimates cotton production to rise 3 percent to 6 million tons (353 lakh 170kg bales). (Full Report)

USDA released the 2017-18 forecasts, reporting a rise in India’s production, 5.7 percent to 28 million bales (358 lakh 170kg bales).

Rise in production would likely thrust cotton prices to Rs 36,000/candy, previously seen at the beginning of 2016-17(Oct-Sept) season.




Conclusion:

The Indian cotton market continues to exhibit bearishness with several supportive factors such as rise in sowing area, prediction of normal monsoon season and incoming imports which is expected to cross 30 lakh 170kg bales in total for the season.

As per market reports, the country has already received 30 lakh bales however we do not have an official data to confirm the above figure. Further, around 6.21 lakh bales of US cotton are yet to arrive bringing the total commitments from US to 13.78 lakh bales for 2016-17. If we include the outstanding US exports then the total import for the season would touch all time high at 36 lakh bales.

On the other hand, the unsold superior quality lint withheld in the ginners of the inventories is another suppressing factor as in the coming weeks they would have to offload their stocks considering the pre-monsoon showers has already hit many regions which would affect the quality of the stocked cotton.

Traders believe, bull trend has not yet completely faded, as prices may have reached the bottom line and beginning from June, a bull rally could be expected which could bring prices back to Rs 46,000/candy range. However, considering the bearish factors having an edge of the bull, even if the market observes a rally, the upside seems limited with resistance at Rs 44,500/candy and Rs 45,000/candy.

At present, the Indian market is lacking direction awaiting some fresh cues to guide the foggy path with a slight lean towards the bear.

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