AGAIN NEAR HIGHS
MARCH 4, 2018
March began with record volatility across the global futures markets with a host of issues causing the swings. First early on March 1 a series of algorithm trading systems triggered large volume selling stimulating flash crashes across many markets within just a few seconds including cotton.
May cotton dropped a 100 points in a flash which then over the next few hours triggered additional selling that extended losses to over 200 points. At the same time other market fell sharply with Crude Oil falling near 1.5 USD a barrel. Then this selling was followed a rally in many markets from new system buying which was very heavy on the close of many markets which was believed to reflect the allocation of new funds to the commodity sector.
Overall May ICE futures appeared to encounter resistance as it attempted to challenge the previous highs. This resistance came from trade selling associated with the final hedging of unsold US 17 inventories and the 2018 and 2019 Australian crops. Another sign of slowing demand at least from traders was a weakening in the US FOB basis , however the weakness is focused on Texas only.
While the FOB basis in the Southeast is at 50 points on May and 100 off in Delta the East/South Texas basis reached 700 off May last week and 8 MARCH 4, 2018 JERNIGANGLOBAL.COM ISSUE NO. 2346 the West Texas basis hit a low of 750 points off May.
These levels did improve to 581 and 631 off after Thursday’s losses. The size of the Texas crop would suggest basis pressure then you add the problems with the Texas ports, the lows in the Texas basis are the widest in two years. This means large losses for growers, with a base grade of 41-4-34 growers which have low mike, bark, low strength face very big discounts.
ICE futures have done overall a very good job of reflecting global prices and developments, however the logistics issues appear to have now reached the point that they could impact futures. The March futures experienced deliveries that appear focused on the Houston area ports. Is this related to the problems with these ports ?
US export sales have continued to the point that the US could totally sell every bale in inventory however if the cotton is sold but unshipped can the futures be inverted or will they be forced to reflect carry? Market inverts are always hard to maintain and merchants holding unshipped inventory when futures are offering a 500 point premium this would offer a greater profit then the sale itself.
We raise the issues because in this world of all electronic trade the spread differences can play a role in the behavior of some Algorithm trading systems. Last week’s spread relationships already could begin to cause some Algo movement. The volume of speculative fund flow into ICE is increasing which means greater volatility in the period ahead.
Adding to the anxiety of the markets was last week’s trade concerns as the US Administration announced import tariffs on Steel and Aluminum . These did not appear focused on China but more on Canada and EU. The real concern is for the US Agriculture sector which is one of the largest export groups, the fear is that Agriculture exports could be impacted by any trade retaliation.
The price action of Thursday created an outside range reversal in the May contract which suggest strong resistance at 83 cents. Unless the logistics issues can be resolved May and July futures may loss some of their upside potential and become much more lethargic in their behavior.
2018/19 futures found support last week from the continued dry weather across the US High Plains region and the allocation of additional new longs from the Index Funds . We expect continued resistance as Dec nears the 78/80 cent region. Support is expected to be strong in any setbacks toward the 72/74 region. MARCH 4, 2018 (Source: Jernigan Global)