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Chinese inventory auction weighs on cotton price
Chinese inventory auction weighs on cotton price US cotton prices are currently hovering at seven year lows following a -8.7%* fall year to date. The decline comes after an announcement from China’s National Development and Reform Commission detailing plans to offload a portion of the nation’s vast cotton reserves, a move which risks further depressing import demand from the world’s largest consumer. Cotton prices have fallen 73% from a 2011 peak of over USc 200/lb as rapidly declining import demand from China and tough fibre competition from man-made materials (such as polyester) have pressured global prices (see Figure 1). However, at current depressed levels a tactical opportunity may be on the horizon. Chinese cotton auctions, like the one recently announced, have, in the past, fallen short of market expectations. If the upcoming stock sale disappoints then cotton prices could quickly become subject to a short covering rally, especially as speculative short cotton positions currently sit at record highs. In addition, there are some initial signs that the fundamental picture of the global cotton market may be improving, albeit by a small amount.
(Click to enlarge)
Market awaits auction details
Last year, a similar cotton auction held by the Chinese authorities failed to muster considerable buying interest as offered prices exceeded market levels, resulting in only 3.4% of the total stock on offer being sold. Details of the upcoming inventory sale remain unknown. Revelation of its size and speed will have considerable bearing on cotton prices in the near term. Should the auction fail to meet market expectations, cotton prices have potential to gain some upward momentum as speculators with short cotton positions are forced to hedge exposure. Similarly, risks lie to the downside if the opposite occurs, however the market will be harder to surprise in this direction as negative implications from the auction have already been somewhat priced in.
While fundamentals for cotton prices remain far from ideal, there are some small signs of improvement. Recent reports from the International Cotton Advisory Committee (ICAC) and the United States Department of Agriculture (USDA) show that global cotton stocks are set to fall by approximately 8% this year, the first decline in five years. The decline in ending stocks looks to be driven by falling production from China as domestic producers reduce output in response to ongoing price weakness.
Shorts near record levels
Net speculative cotton positioning reached a 10 year low this month as short positions rose to an all-time high and speculative long positions retreated to a two year low (see Figure 2). The rapid accumulation of short positions leaves cotton prices vulnerable to a pullback, should an appropriate catalyst emerge. With the upcoming Chinese reserve auction at the forefront of market concerns, it has the most potential to be a cause of such a pullback.
(Click to enlarge)
Investors wishing to express the investment views outlined above may consider using the following ETF Securities ETPs:
COTTON
ETFS Cotton (COTN)
ETFS 2x Daily Long Cotton (LCTO)
ETFS 1x Daily Short Cotton (SCTO)
ETFS EUR Daily Hedged Cotton (ECTN)
Swiss Franc Daily Hedged Cotton (CCTN)
The complete ETF Securities product list can be found here.
For more information contact
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
Important Information
General
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority.
Hashdex Nasdaq Crypto Index ETP, den största kryptoindexprodukten i Europa med över 500 miljoner USD i AUM, har nominerats till ETF Stream Awards 2024, i kategorin ”Digital Assets ETP Of The Year”!
Hashdex är glada över att se sitt engagemang för att tillhandahålla innovativ, reglerad tillgång till kryptotillgångsklassen erkänd. Detta erkännande belyser deras ledarskap när det gäller att utveckla kryptoinvesteringslösningar.
Hashdex Nasdaq Crypto Index ETP, den största kryptoindexprodukten i Europa med över 500 miljoner USD i AUM, har nominerats till ETF Stream Awards 2024, i kategorin ”Digital Assets ETP Of The Year”!
Detta erkännande belyser Hashdex engagemang för att tillhandahålla innovativa, robusta produkter som förenklar tillgången till kryptotillgångarnas värld. HDX1 erbjuder diversifierad exponering och tydlighet på en komplex marknad, vilket förkroppsligar Hashdex uppdrag att föra kryptons framtid in i nutiden av investeringar.
Prisutdelningen äger rum den 28 november i London, där Hashdex kommer att ansluta sig till branschens främsta ETF-spelare.
For years, India has been ramping up to contend with China as the region’s top technology leader. Pandemic-era supply chain issues hastened its successes in luring foreign tech firms. Now, equity investment flows are following suit. Dina Ting, Head of Global Index Portfolio Management at Franklin Templeton, highlights a few factors behind how the subcontinent is benefiting from rotational flows.
As China braces for renewed friction over President-elect Donald Trump’s tariff threats, investor flows may be following similar currents as those of regional supply chain shifts—that is to say, diversifying from China and toward opportunities in markets such as India and Japan.
After the People’s Bank of China revealed the most aggressive stimulus package it’s rolled out since the COVID-19 pandemic, China stock markets saw a short-lived rally at the end of September. A lack of detailed measures targeting consumption seems to have disappointed investors and led the bullish sentiment to deflate.
Adding to the country’s economic woes are societal changes like falling birthrates and a rapidly ageing population. Estimates by China’s National Health Commission suggest the country’s elderly population will grow to over 400 million by about 2035. To better cope with this crisis, China’s statutory retirement age will be extended, starting in January 2025, for the first time since the 1950s.
India investors, meanwhile, are finding the subcontinent—which has already overtaken China as the world’s most populous nation—appealing for its relative immunity to global risks, given its domestic-driven economy. Its younger labor force has also attracted a market pivot to this prime alternative to China manufacturing. For the 12-month period prior to China’s September 2024 stimulus announcement, US-listed India equity exchange traded funds (ETFs) garnered US$7.5 billion in flows—a sharp contrast to the US$6 billion in outflows experienced by China ETFs over the same period.1
Judging by India’s impressive initial public offering (IPO) environment, businesses there are feeling the optimism. The country’s 258 IPOs accounted for 30% of the global total by number by the end of September and 12% by the amount of money raised, in an economy that makes up just over 3% of global GDP.2
And investors in India are taking note. Aided by the improving digitalization of finance and increased internet access, India’s middle class is also an expanding retail investor class. By one measure, nationwide stock trading accounts nearly tripled from 2019 to 2023 to roughly 140 million.3
In dollar terms, total returns for Indian stocks have risen by 93% over the past five years, compared with about a 24% rise overall for emerging markets and drop of 5% for China stocks over the same period.
Many investors seeking to better diversify emerging market exposure or layer in targeted broad country allocation can tap single-country exchange-traded strategies.
Emerging markets in the Asia region are not the only beneficiaries of a potential US-China trade war. Earlier this year, investors were already driving up flows into Japan ETFs. Market watchers consider Japanese stocks to be indirect beneficiaries of Trump’s reflationary economic policy—which may keep interest rates high, thereby boosting the dollar and weakening the yen to the advantage of Japanese exporters.
The MSCI Japan Index is up nearly 21% in US dollar terms in the one-year period ending October 31, 2024. Consumer discretionary, financials and industrials holdings led gains during this time.
An element of uncertainty around the policies of a second Trump term, however, are still causing jitters around Asia, especially given the president-elect’s transactional approach to international relations.
Fortunately, Japan is seeing a renaissance in its semiconductor industry for which Tokyo is investing heavily (more than US$25 billion through 2025) and has established strong multilateral trade partnerships.
Japan has already elevated its role in global supply chain reorganization in recent years, and seeks to take advantage of its clout in joint free trade initiatives, such as the US’s Indo-Pacific Economic Framework for Prosperity to strengthen its regional supply-chain leadership.
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