NY futures continued to move higher over the holiday period, with March advancing 509 points since our last report on December 18, closing today at 50.37 cents, while December gained 523 points to close at 56.71 cents.
Despite all the negative news on the textile front, the March contract has managed to climb back over 10 cents since posting a closing low of 39.91 cents on November 20, and it did so in surprisingly light volume. There were several factors that contributed to this rebound.
First of all, the way the various market participants were positioned was the perfect set-up for a bounce. After traditional speculators and hedge funds had liquidated the bulk of their holdings by November, there were basically just two opponents left in the game - on the one hand the trade with a 6.4 mio bales net short position and on the other hand index funds with a 6.7 mio bales net long position.
As we all know by now, index funds are not driven by price but rather by the amount of money that flows in and out of these commodity baskets. After the financial crisis unfolded we saw a lot of money move out of index funds, with the result that holdings of such funds dropped from around 12.2 mio bales of cotton in March to just about half of that amount in October. However, since then index fund investment has remained relatively stable at around 6.5 mio bales.
With hedge funds mostly out of the game and with index funds in a passive role, the trade was basically running its own show with a net short position of around 6 to 7 mio bales. The problem with such a lopsided set-up is that it leaves these shorts vulnerable in case something unexpectedly changes.
Even though we didn't see any major changes in supply and demand, and business in the cash market remained anemic, there were a number of other factors that allowed the market to move higher. What started the ball rolling was government intervention in China, India and the CIS, who supported their local prices by mandating either a minimum price and/or by absorbing excess inventory into government reserves. This in turn led to fewer offers and higher prices in these origins, which caught some merchants by surprise, as they had shorted some of these origins in anticipation of lower prices down the road.
Small scale merchant short-covering and some new mill buying were enough to give the A-index a firmer appearance and this caused the AWP to trend higher as well. This trend reversal did not go unnoticed by speculators, who covered some of their shorts and added a few new longs, which helped to fuel this uptrend.
Again, there was not much volume behind this 10 cents advance and the following table shows how little the positions of the various market participants have changed since the end of November. The biggest net change occurred in the spec sector, which bought about 1.0 mio bales during that time frame, while the trade increased its net short position by about 0.7 mio bales, but it did so only on rallies that allowed it to lock in a favorable spread to the AWP. As already stated, index fund positions have remained relatively passive during this period.
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