Cotton market has seen significant changes during the first half month of Mar. In early month, ZCE cotton futures still have upward momentum under the favorable macro environment with higher than expectation of purchasing managers' index (PMI) for China's manufacturing sector in Feb. Nevertheless, the market gradually steps downward from Mar 10 under unfavorable macro economy. On Mar 10, U.S. bank stocks slumped overall, and on Mar 11, Silicon Valley Bank announced to be closed, triggering risk aversion, while the panic mood has not simmered apparently as the U.S. Treasury Department, the Fed, and the Federal Deposit Insurance Corporation on Sunday announce joint action to stabilize the U.S. banking system. But on Mar 15, Credit Suisse shares fell to new record low, triggering more banking system problems, and ZCE major cotton contract dipped below the support level of 14,000yuan/mt on Mar 16. In general, the cotton prices are dominated by the macro environment currently, and the role of cotton industry played is not very important now. Of course, the weaker cotton yarn sales around Mar 10 put certain pressure on cotton market as well. But the risk aversion brought about by the crisis of Silicon Valley Bank and Credit Suisse is still the "scourge" caused by the Fed's interest rate hike.
The Silicon Valley Bank鈥檚 failure was due to a mismatch of assets and liabilities. The Bank took on too many huge deposits, and was caught by higher interest rates. It kept a small part of deposits in cash and used the rest of them to buy long-term debt like Treasury bonds or invested it in mortgage-backed securities (MBS). Those investments offer good returns when interest rates remain low. However, SVB hadn鈥檛 considered that the Federal Reserve started hiking interest rate to combat the high inflation. Moreover, the Credit Suisse event dampened the market sentiment again, resulting into lower commodity and cotton prices on Mar 16. Players are still wary about the banking system problems and systematic risks. Of course, some players believe that current banking system problem has little impact on the market, and the decline of bank shares is more of a threat to the upcoming European Central Bank and Federal Reserves鈥 interest rate decisions. If the Fed stops interest rate hike or cut the interest rate, the market sentiment will ease in short, and cotton prices will rebound, but the credit status of the U.S. dollar as the global reserve currency will be further impacted, and some hidden dangers will continue to be burdened.
For the cotton industry, the bullish factors are: 1. 2023/24 Xinjiang cotton planting areas may reduce, and attention is paid to the 2023/24 Xinjiang cotton planting subsidy; 2. Numbers of ginning factories increase in 2022/23 and ginners have good returns in 2022/23 season, so ginners may be rush to purchase new cotton in 2023/24; 3. Good Chinese domestic demand supports the high operating rate of spinning mills, and the consumption of cotton is high recently. The bearish factors are: 1. 2022/23 Xinjiang cotton production is over 6 million tons, an increase of 12% year on year, leading to high ending stocks, offsetting the stimulus caused by lower planting areas; 2. Overseas demand maintain, and whether the good domestic demand will sustain is uncertain.
In general, the macro environment is complicated in 2023, and cotton prices may fluctuate with shorter frequency, and are hard to see tendency. Viewed from current situation, cotton prices are supposed to be easy to decline and hard to rise in the second quarter.
