Forexpros – U.S. soft futures came under selling pressure during early U.S. morning trade on Thursday, as disappointment over the lack of aggressive monetary stimulus from the Federal Reserve prompted investors to shed riskier assets.
Renewed concerns over the outlook for global growth further weighed. Jitters over the global economic outlook have pressured soft commodities in recent weeks.
Manufacturing activity in China fell to a seven-month low in June, as export orders remained firmly in contraction. The Asian nation is the world’s largest consumer of sugar and cotton.
A deeper slowdown in China, the world’s second biggest economy, would impair a global expansion that is already faltering because of the euro zone’s ongoing sovereign debt crisis.
In the euro zone, data showed that manufacturing activity in the region contracted at the fastest pace since June 2009 this month, with the purchasing managers’ index falling to 44.8, down from a final reading of 45.1 in May.
Manufacturing activity in Germany slowed to the lowest level in three years in June, as the ongoing euro zone crisis hit export demand.
Investors remained cautious ahead to the outcome of an audit of Spanish banks later in the day, amid concerns that the results could show that a EUR100 billion bailout for the country’s banks agreed earlier this month would not be large enough.
Spain’s Treasury sold slightly more than the targeted amount of EUR2 billion at an action of government debt earlier in the session, but the country’s borrowing costs rose sharply.
The average yield on the five-year bond climbed to 6.07%, up from 4.96% at a similar auction last month.
Futures were already on the back foot after the Fed announced Wednesday that it was extending its current bond buying program, known as “Operation Twist”, until the end of the year and said that it was ready to take additional steps. The bond purchasing program had been due to expire at the end of this month.
Under Operation Twist, the Fed sells short-dated Treasury instruments and buys longer-dated Treasury’s in tandem with the aim of pushing down long-term interest rates.
The announcement disappointed market expectations for more aggressive measures to shore up growth in the world’s largest economy, following a recent string of weak U.S. data.
Sentiment was also dampened after Fed officials lowered their estimates for economic growth, citing a weak jobs market and a depressed housing sector.
The dollar index, which tracks the performance of the greenback against a basket of six other major currencies, was up 0.15% to trade at 81.73.
A stronger dollar reduces the appeal of U.S. crops to overseas buyers and makes commodities less attractive as an alternative investment.
On the ICE Futures U.S. Exchange, cotton futures for October delivery traded at USD0.7040 a pound, tumbling 1.85%. It earlier fell by as much as 2.85% to trade at USD0.6874 a pound, the lowest since June 6, as a rally sparked by short-covering ebbed.
Front-month cotton prices have surged nearly 17% in the seven sessions leading up to Tuesday, as prices were boosted by a flurry of short covering ahead of the first notice of delivery for the July contract on June 25.
Market players said that a large cotton trading house has put pressure on traders holding short positions in July to exit those positions.
Trading is normally intense in the cotton market in the run-up to the first notice day for deliveries, as most market participants seek to exit contracts to avoid having to deliver supplies.
Prices continued to draw support from signs of increasing demand from top consumer China after the U.S. Department of Agriculture announced a huge sale of new-crop cotton to China last week.
China bought close to 94% of the 795,700 bales of the net export sales from the U.S. in the week ending June 7, in an attempt to boost government stockpiles after prices fell to attractive levels.
Front-month prices slumped to a 32-month low of USD0.6617 a pound on June 4. But futures have been on an uptrend in recent sessions, gaining nearly 25% since then.
Despite the recent gains, the fiber is still down almost 60% from a record in March 2011 as higher prices prompted farmers to plant more crops and demand in top consumer China slowed.
Elsewhere on the ICE Futures U.S. Exchange, sugar futures for July delivery traded at USD0.2148 a pound, retreating 0.75%. It earlier fell by as much as 1% to trade at a session low of USD0.2141 a pound.
Prices touched USD0.2179 a pound on Wednesday, the highest since April 26.
Sugar prices have gained approximately 13.5% since dropping to a two-year low of USD0.1886 a pound on June 4, as concerns that heavy rains in Brazil could damage sugarcane crops in the country’s center-south region boosted sentiment on the sweetener.
The nation’s leading sugar cane industry association Unica said last week that mills in the center-south crushed 35.62 million metric tons of cane in the second half of last month, down 18% from a year earlier.
Brazil’s Center South-region produces nearly 90% of the nation’s sugar. Brazil is the world’s largest sugar producer and exporter, with the USDA estimating the nation accounts for nearly 20% of global production and 39% of global sugar exports.
However, market participants were wary of pushing prices higher, as the sugar market remains in a major bear trend. Prices are down approximately 42% since hitting a three-decade high of USD0.3594 in February of last year.
Meanwhile, Arabica coffee for September delivery traded at USD1.5325 a pound, gaining 0.75%. The September contract traded in a tight range of USD1.5335 a pound, the daily high and a session low of USD1.5147.
Coffee fell to as low as USD1.4887 a pound on June 14, the lowest for the second-month contract since mid-June 2010, as the market moved lower ahead of the harvest from Brazil.
Despite the modest gain, coffee prices have been under pressure in recent months, losing nearly 34% since mid-January as traders eyed a huge harvest in top grower Brazil and speculators pushed prices lower.
Market participants said that coffee prices remain vulnerable to losses as hedge funds and large institutional investors liquidate long positions amid concerns over the global macroeconomic outlook.
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