Fundamentals Having Little Impact on Market

Fundamentals Having Little Impact on Market

For the third consecutive week, cotton prices plummeted. After dropping over seven cents last week, it has given up an astounding 28 cents for the month. It now finds itself only 270 points shy of its 52-week low of 82.54, a key support level. It is obvious cotton is trading with little regard to fundamentals, instead macroeconomic factors are the driving force.

How else could one explain near limit down trading with the entire Southeast crop in the path of an impending hurricane. Conversely, why was there not a sizeable selloff following Thursday’s dismal export sales report? We would be true in saying as goes the equity market so goes cotton.

Since mid-August, as the Dow Jones fell 14 percent, cotton declined 28 percent. During the same period, corn has gained 14.5 percent with soybeans up one percent. I do know this old farm boy is tired of spending more time reading the Wall Street Journal than Cotton Farming magazine.

Considered an economic commodity, cotton prices are reeling with major global recession all but inevitable. A confluence of factors like never before seen is catapulting the world economy to this end. Never have central banks raised interest rates at the same time by so much. The U.S. was one of 10 banks who recently hiked rates for a combined six percentage points. Such simultaneous tightening of monetary supplies could be disastrous, as too much too quickly.

With economic conditions deteriorating, a negative wealth effect is being created. Faced with higher prices for goods and lower asset prices, consumers will be compelled to spend less. The S&P is currently down 23 percent, its worst start in history while on pace for its biggest drop since 2008. Making matters worse, bonds, usually considered a haven in times of falling stock prices, are having their worse year since 1949.

Lastly, the extreme volatility in national currencies is a great concern. As the U.S. dollar soars to record heights, the English pound is at an all-time low. Even Japan, not known to manipulate their currency, made a move to prop up the yen for the first time since 1998. Such dire conditions are apt to hinder economic growth setting the stage for a prolonged global recession.

In search for something positive, the Southeast crop was spared as Hurricane Ian with all its wrath veered east through central Florida and up the Eastern seaboard. Our thoughts and prayers go out to those that were in the path of this most devastating and damaging storm.

Fortunately, it was more a rain event than wind for cotton affected. Though some quality losses may occur, yield losses should be minimal. With harvest well underway, as many were trying to get a jump on Ian, excellent yields are being reported. This is welcomed news since the cotton currently being picked had greater boll rot damage and later cotton has the potential to be even better.

Where to from here? Cotton prices will continue to be influenced by daily economic events. A look at the Dow at any given time will give you a semblance of the direction cotton prices are moving. To stem this month-long decline, it is critical the July low of 82.5 cents holds. Upward resistance will be found at 92 cents. However, a return there will require signs of strengthening demand.