- New Science in old markets -

Cotton extends, so do Italian bonds

Within hours of writing about grains and cotton yesterday, cotton produced a bottom extension. This has the usual meaning - that the current drop will end at any minute and that a rebound is likely. There is always a slight risk of another day or so of further weakness and further extensions but the worst is over, for now.

Longer-term the picture remains cloudy as the price is falling away from recent weekly-scale compressions so further weakness is probable in the 3 or 4 months to come. Brave traders might try to buy hereabouts for the bounce but it is more prudent to ‘wait it out’ and sell the rally as (or rather, if)  it approaches the level of those weekly compressions:

As we wrote yesterday, any rally in cotton will probably help grain markets move higher and so this is an extra reason to hold on to soya meal bought yesterday or any remaining wheat long positions you may still have from the September 25th edition. This should grant some extra life to rallies in those two contracts.

Elsewhere, Italian bond futures made a top extension earlier in the week:

This is only at a daily scale but there is some complacency in Europe right now that the ‘Euro crisis’ is over and that growth is imminent in the Southern countries. Regular readers will know that we take a different, much more pessimistic view and think that the single European currency locks less productive countries to more productive Germany in a ‘death grip’ that cannot easily be relaxed. Growth will be elusive in Spain, Italy, Greece and Portugal for the foreseeable future and so their large debts will remain unserviceable. Temporary patches cannot fix this terrible situation and so the relief rally that we have seen in Southern European equities and bonds is on weak foundations. Some bond top extension (just like this one) will mark the end of this period of false cheer and the situation will begin to unravel again. The equity markets of Spain, Italy, Portugal and Greece have all extended recently, as reported (so have Germany, Norway, the UK and the Nasdaq in the US) but it will probably be a Southern European government bond market slide that starts the next real panic. It is worth being short of BTPs here for a week or two, just in case that moment has arrived.