ICE Cotton traded firmer with an improving technical picture and climbing open interest throughout most of the week, settling at 87.18. The market’s move higher, China’s holiday, continued uncertainty about cotton quality, and merchants’ unwillingness to commit specific qualities without a better feel for the crop have all served to limit additional physical business.
The uncertainty is hardly helped by the lack of government reporting on which the industry relies, and now the impending arrival of Tropical Storm Karen; many ag markets could be in for volatile trading when data releases return.
Add it all up and there are pressing supply questions, while firm demand below the market is well known. It is doubly surprising given all this that the Z/H spread has not inverted during the market’s rise from 84 to near 88 cents, and that some of the bales de-certed in July may re-appear for December delivery.
But before fundamentals push through the market has to first deal with uncertainty and the blow to confidence caused by the US government shutdown. While the direct economic impact of reduced government spending will only reduce GDP by several tenths of a percent, the knock-on effects to business and consumer sentiment could be much larger, and will grow the longer the shutdown goes on.
Gains in the housing market, which had recently strengthened, will likely soften. And of course, investors are most concerned with the US’ need to raise the debt ceiling by October 17th, failing which the Treasury would begin to default in bond markets.
Politicians are saying this won’t happen, but the seemingly hardening of positions in Congress and low expectations are hardly reassuring. Everyone agrees “tapering” is now off the table for the for-seeable future, which despite everything else may be the reason stocks and commodities are holding up fine despite the Beltway shenanigans.
