While the current liquidity squeeze may be short lived, the market is now worried that this changed credit environment will eventually affect the general economy and lead to a recession.
The re-pricing of over a trillion dollars worth of adjustable rate mortgages is expected to lead to increased foreclosures over the next 6 - 12 months, which may put pressure on housing prices and wipe out of a lot of home equity.
Think of it as a reverse wealth effect, which could scare consumers into sitting on their wallets. Since over 70% of the GDP in the United States is based on consumer spending, it is easy to understand why the market is so worried about a recession.
Had it not been for the turmoil in the financial markets, cotton would have had several reasons to trade higher this week. For one there are weather concerns, as the extreme heat in the Mid-South and Southeast continued to take a toll on the crop and what once looked like a record crop is now being reduced to an average one.
A little further to the west, the open South Texas crop received unwelcome heavy rain from tropical storm Erin this morning, which may have caused some yield and quality losses.
Another positive development was the pick-up in US export sales, as nearly 400'000 bales of Upland and Pima cotton found a home last week. With prices being even lower now, we should see continued good demand for US cotton.
marketing@alchempro.com
