Cotton May Extend Drop as Chinese Equities Slide
As cotton prices hit lowest point this month, some experts draw a correlation between Chinese stocks and cotton futures.
August 20, 2009
Cotton may extend this month’s price decline because of slumping equities in China, the biggest user and importer of the fiber, said Dennis Gartman, an economist and the editor of the Gartman Letter.
Cotton fell on Tuesday to the lowest price since July 30, after the Shanghai Stock Exchange Composite Index touched a two-month low. The index, down 15 percent this month, is a key indicator of expectations for growth in China and demand for commodities, from metals to pork to soybeans.
“From month to month, different things are on everyone’s radar screen,” Gartman said Tuesday by telephone from Suffolk, Virginia. “Right now, everybody is watching the Chinese stock market. All other things being equal, if the Chinese stock market plunges, cotton prices will err on the side of weakness.”
While there may be no long-standing correlation between Chinese stocks and cotton futures, Gartman noted a relationship in the past few days. The Shanghai index lost 8.6 percent in the two sessions through Monday, while cotton prices slid 7.3 percent in New York.
Cotton futures for December delivery fell 0.52 cent, or 0.9 percent, to 58.89 cents a pound Tuesday on ICE Futures U.S. in New York. Cotton has dropped about 10 percent since reaching a 10- month high of 65.47 cents on Aug. 13. The Shanghai index has slipped 16 percent since reaching a 14-month high on Aug. 4.
The Chinese equity market “is likely to head lower for a while,” Gartman said. “It’s a little overextended.”
China’s economic growth may slow from 18 percent in the second quarter to 5 percent by the first quarter of 2010, Deutsche Bank said yesterday in a report. Growth in fixed-asset investments, industrial production and new lending in July was lower than expected, signaling fewer project starts and signs inflation may accelerate, the bank said.