It was a combination of technical weakness and economic worries that weighed on the market this week, as the spot month moved perilously close to the important 90 cents support level, settling at its lowest level since March 13. From a technical point of view, we had a negative crossover of the 7-day vs. the 21-day Exponential Moving Averages earlier this week, which over the years has served as a reliable timing tool for getting in and out of positions. This is the first crossover since early December, when this measure gave us a buy signal that remained in force until this week. A look at the candlestick chart shows that sellers are now firmly in control and threaten to push the market through the 90 cents support level, which would likely trigger additional sell stops.
After several months of positive money flows into the commodity complex, fund managers have started to pull some money off the table, according to the latest CFTC report. Net long positions in Futures and Options across 13 agricultural commodities saw their biggest drop in seven months and the outflow seemed to continue this week. Better crop prospects and a dismal economic outlook for China and Europe were among the reasons cited for this 'risk off' move by hedge funds.
However, not all commodities saw their speculative net long positions reduced, among them cotton, where specs increased their net long by 0.56 million to 6.34 million bales during the week of May 6. The trade was on the other side adding 0.59 million bales to its net short position, which amounted to 12.77 million bales, of which around 6.8 million bales were in July according to the 'disaggregated' CFTC report. Although overall open interest has declined by about 3'000 lots since May 6, there hasn't been any widespread spec exodus just yet, although some of them have started to roll their longs from July to December, which is putting pressure on the inversion. Last Friday's USDA supply/demand report contained no major surprises, which is why the market had such a muted reaction to it. The story remains more or less the same as in the previous 3 seasons, i.e. a production surplus in the ROW, with Chinese imports absorbing most of it. Interestingly, ROW production and mill use numbers for 2014/15 are nearly identical to this season, with ROW production at 85.96 million (versus 85.13 million) and mill use at 74.83 (versus 73.88 million), resulting in a surplus of 11.13 million (versus 11.25 million this season). The main difference is the lower expectation for Chinese imports, which are estimated at 8.5 million bales in 2014/15, compared to 12.75 million this season. This should allow ROW stocks to recover slightly, from a relatively tight 38.35 million bales inventory to a more ample 41.15 million bales by the end of next season.
