ICE Cotton No.2
The escalating trade war between the U.S. and China has prompted a severe selloff following the news China would hit back with tariffs on a string of U.S. goods including cotton.
The market broke below range support with the leading May18 contract losing 340 points at some point in yesterday’s session. Volume was heavy with over 90’000 lots of futures trading, including about 35’000 lots of spreads.
The break lower triggered good mill price fix buying on one hand and spec selling on the other. Interestingly, the May18-Jul18 spread has remained steady despite the general market weakness and the ongoing fund rolling.
As far as new crop is concerned, the Dec18 contract until yesterday did not settle below 77.00 since late February. Good forward buying interest, the anticipation of continued strong mill demand, as well as dry weather conditions in West Texas have been strong price support factors. To keep prices in the high 70’s (or to see them climb higher), it appears a must that those bullish forces remain at play for a sustained period. This may certainly be the case, but it may be prudent to contemplate that it may not take much to change the current picture.
Technical picture: May18 broke below range support and reached the minimum down-side objective area, i.e. 79.00-78.50. Settling and building value below 78.50 sets 77.00-76.50 as next target. Resistance is at 80.30-81.20 (about former support), key at 83.00 and 84.00.
USA – The big news this week, tit for tat trade tariffs between China and the United States, and the cotton market was eventually negatively influenced by this high stakes political game. The likelihood of any of the tariffs actually going into effect is up in the air and possibly many months down the road. We leave it to the various major news outlets to explain all the repercussions in detail, however it is disappointing that commercial continues to be affected by politics and governmental decisions.
Cotton specific news almost overlooked, was the USDA Planting Report late last week, indicating 13.5 million acres of all U.S. cotton, a 7 % increase over 2017. The acreage forecast was a little higher than most pre- report guestimates, and it gave little fundamental rationale for any bullish reaction. Acreage increases are projected in 15 of the 17 cotton producing states in the U.S. Only Louisiana, Mississippi and Virginia showed slight decreases. The largest state acreage estimates came from Texas, 7.3 million acres and Georgia, 1.45 million acres. Planted and final acreage in Texas remains still a big question mark, depending on the development or not of the spring and early summer rains.
India – Market activities remained subdued due to the financial year end closing and regional holidays. Daily all India cotton arrivals are expected to slow down mid-April onwards. Some private weather forecasting agency predicted the southwest monsoon would be normal this year.
The MCX (April contract) market is consolidating between 20’150 and 20’680. The short-term outlook is neg- ative, with the next downside target at 19’850 if 20’150 is broken. Resistance is at 20’680 & 21’000.
China – The short-term technical outlook is negative. ZCE cotton futures are testing contact lows at 15’120 (basis Sep18/most active contract). The overall trend remains neutral as long as prices stay above 15’000. The forward curve is in contango and is showing almost full carry through to the Jan19 contract.
The week was shortened by the Qing Ming festival on Thursday and Friday. During the first three days of the week, Reserve sales continued in the same rhythm of around 15’000 tons daily; all offered high grades from Xinjiang origin are regularly 100% sold out. If the selling pace is maintained, total Reserve sales from March- August 2018 could reach 2.3-2.5m tons.
Big news of the week were of course the trade tensions between US and China. After the announcement by the US of a large list of Chinese imports worth around 50 billion USD per year potentially to be submitted to tariffs, China has threatened a retaliatory tariff of 25% on various US exports of about the same value, includ- ing cotton. For the time being, neither threat is a reality and negotiations are going on.
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