Credit crunch may negatively affect on cotton prices
11 Aug '07
3 min read
NY futures retreated this week, with December dropping 216 points to close at 62.42 cents.
Worries that a credit crunch could forestall economic growth took center stage this week and weighed down stock and commodity markets. After years of unprecedented credit expansion, there are now clear signs that easy money is a thing of the past, as lenders are tightening credit terms and liquidity is drying up.
For example, a few days ago a major US bank raised its 30-year mortgage rate from 6.75 to 8% with a requirement of at least a 30% down payment. Today, the largest bank in France, BNP Paribas, joined Bear Stearns and Union Investment in stopping withdrawals from investment funds that owned subprime loans because it can't determine a fair value on their holdings.
Further, the European Central Bank today said it would provide unlimited cash in reaction to the fastest increase in the overnight LIBOR rate since 2004, which jumped from 5.35 to 5.86 percent yesterday. The fact that the ECB is treating this like an emergency is fueling fears among traders and the nervousness is now spreading to other asset classes as well.
These events could have a negative effect on cotton prices for two reasons. First, a credit crunch may lead to a recession and affect consumer spending for discretionary items such as apparel and home textiles. Second, if hedge funds get into trouble as leveraged bets turn sour, it could lead to margin calls and redemptions, which could force the liquidation of existing positions. As of last Friday, speculators, many of which are hedge funds, still owned a net long position of around 6.7 mio bales or 30.9% of open interest.
marketing@alchempro.com
