In the past week (June 20-24), major changes have taken place in the international cotton market. The Federal Reserve pushed forward to raise interest rates to curb inflation at the expense of economic growth, triggering a strong earthquake in the commodity market. ICE cotton futures experienced a rare plunge, and the main December contract It fell from 118 cents to 98 cents, directly erasing all the gains in the past six months. The market that seemed stable the week before collapsed in an instant, leaving many people in the industry speechless in shock.
In fact, there are early signs of price decline, and the attitude of funds has said everything. As of June 14, the net long position of cotton market funds has declined for six consecutive weeks, and is currently only 47% of the high point in October last year. With the market decline in recent weeks, cotton futures positions have dropped sharply from nearly 200,000 lots to 150,000 lots. As an industrial commodity, cotton has always been very sensitive to changes in the economic situation. Once the market anticipates an economic recession, cotton demand will drop instantly, and panic selling is inevitable.
With the sudden collapse of cotton prices, the market is most concerned about how cotton prices will develop next. Before the sharp drop in cotton prices, the market’s focus had been on the weather and supply, and it selectively ignored the decline in cotton consumption. It was not until the economic recession caused a serious setback in consumption that panic selling occurred in the market. Judging from the actual situation, the world is still in the recovery stage after the epidemic, and the general trend is still developing upward amidst twists and turns. However, the current excessive inflation has affected the normal recovery of the economy, and the impact on cotton demand is far less than at the beginning of the epidemic. . The market needs time to resolve the crises and problems in each link of the industrial chain. If handled properly, it will be conducive to the healthy development of the cotton market.
It is worth noting that while commodity prices plummeted last week, the U.S. stock market has rebounded for several consecutive days. On June 24, the Dow Jones index rose by more than 800 points, halting three consecutive weeks of decline. This was due to the fall in inflation expectations from the University of Michigan. boosted market confidence. Foreign analysts believe that the Federal Reserve’s more aggressive pace of raising interest rates may slow down as inflation expectations cool. Federal Reserve officials said in their speech that the risk of recession in the U.S. economy has been “over-exaggerated” and that it is too early to discuss a U.S. economic recession because there is no sign that household spending will see a substantial decline. However, they still maintain a hawkish attitude towards raising interest rates. A straightforward and aggressive rate hike is still needed to nip it in the bud and bring inflation back to the 2% target.
After the collapse of cotton prices, although the strength of cotton prices has not completely ended, significant changes have taken place. Under the premise that the Federal Reserve continues to raise interest rates in response to inflation, the previous high (133 cents in the December contract) is likely to become the high point of the year. At present, the December contract has broken through the 200-day moving average. Before the US cotton area, inflation, price points and other factors drove the cotton price to rise sharply, the December contract had been stable at around 90 cents for a long time. This adjustment may return to this level. In addition, although the degree of panic in this economic recession is far less than that of the epidemic two years ago, the market needs to pay attention to whether there are more negative factors in the fundamentals. The U.S. cotton sown area report at the end of this month and the USDA supply and demand forecast next month will be basically provide more accurate guidance.
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