The price of the December ICE futures contract began to rebound after falling to a low of 70.21 cents on Monday. As of last Friday, it rose 17 cents to close at 86.93 cents, almost regaining all the ground lost in the previous three weeks.
What’s even more impressive is that cotton futures have been trading at their daily limit for three consecutive days. With the macroeconomic environment showing few signs of improvement, this positive move was unexpected.
Last Monday, ICE cotton futures appeared to confirm a harvest low. The question now is, does this rally have the ability to break above $1 again, or is it just a bear market rally? There is always some position movement among traders as the front-month contract approaches delivery.
However, last week’s high trading volume suggests a heavy weight on speculative trading. Speculative funds have been selling off since reaching a net long position high of 11.5 million bales and 110 cents a year ago. Over the past nine weeks, a total of 4.4 million bales have been sold, with prices down 28 cents. This is clearly a herd effect, like when the first cow rushes toward the gate, the others follow.
Such was the case last week, with panic short covering taking place as the technical graphics improved and the descending trend lines and moving averages were exceeded. Whether this is a market reversal or a bear market rally depends on the extent of short covering, or whether there is speculative net buying.
Unusual U.S. cotton export sales last week also boosted futures prices. Total sales for the current and next year were 203,200 packs, up 173% from the previous week and 59% above the four-week average. It was the best sales week of the year, and China accounted for nearly two-thirds of sales.
Despite the positive changes in the market, prices still face high inflation, a strong dollar, rising borrowing costs, rising tensions in Ukraine, the European energy crisis and difficulty in surging demand from China. All of this will certainly limit consumer spending, negatively impacting demand. Without demand, market progress will not be sustainable in the long term.
In the short term, prices are expected to stabilize in the nearby trading range as speculative short covering will slow and further selling pressure is now highly unlikely. However, two events this week will have an impact on the market. First, Tuesday’s election could give markets a shot in the arm if there is a change in leadership in the U.S. Congress.
The US government will return to the concept of fiscal austerity and stability, which will be welcomed by the business community. On the other hand, the US Department of Agriculture’s supply and demand forecast report will be released on Wednesday, and global consumption is expected to decline sharply again. Many industry insiders believe that the actual global consumption scale will be close to 110 million packages. If so, the resulting expected increase in global ending stocks could threaten this rally.
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