Commodities made the news earlier this week when precious metals and oil experienced sizable declines earlier this week. Silver dropped 3.5% on Tuesday and WTI crude came close to dropping below $100/barrel. But it turns out that the biggest decliner so far this week is neither a precious metal nor energy related; it's cotton.
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After falling precipitously in mid 2011 (
we discussed this in 2011 end of year post), front month cotton futures have been trading in a relatively narrow channel for the past five months. With this weeks decline, cotton is approaching the bottom edge of that channel.
According to this article from Reuters, this recent sell off was due to a combination of a lower probability of QE3 signaled by the fed with reduced cotton demand in China.
With decreased chances of continued easy money over the next two years, some investors exited so-called risky assets. "We are still suffering from the risk-off trade after the Fed said there is little likelihood of a QE3 (third round of easing)," said Ron Lawson, managing director of logicadvisors.com in California.
I'm not so sure I agree with the "Fed pulling the plug on QE3" line of reasoning. If true, one would've expected a more broad based sell off in commodities this week, which we didn't get. For the week, 14 out of the 29 commodity futures we track are up and even WTI and Brent, which saw heavy selling on Monday and Tuesday, are now back in the green.
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