New York cotton races to five-cent limit

New York cotton futures soared to their 5.0 cent daily limit at Tuesday's open, playing catch-up to the overnight rally when it surged to levels unseen since November 10, as buyers continued betting that supplies would not be sufficient to meet demand in top consumer China, brokers said.
Technical buying took over when a large gap was left open on the cotton chart overnight, as buyers in China followed up the 4.0 cent daily limit rise in Monday's session. Benchmark March cotton prices on ICE Futures US rose the 5.00 cent daily limit to $1.4597 per lb, the highest level for a second position cotton contract since November 10. March futures later pulled off the high to trade at $1.4557, up 4.6 cents, or 3.26 percent.
Volume for the contract was healthy at 9,877 lots by 11:10 am EDT (1610 GMT) At Monday's close, total volume traded hit about 12,500 lots, about two-thirds below the 30-day average of 34,500 lots, Thomson Reuters preliminary data showed.
Monday's rally was ignited by the lack of interest rate increase by the Chinese central bank. Over the weekend, China released its latest slew of very strong economic readings that suggest demand for cotton would remain strong. For November, year-on-year retail sales shot up 18.7 percent and industrial production surged 13.3 percent. At the same time, a hefty rise in China's inflation readings prompted many investors to conclude that China might raise interest rates to slow the rapid pace of economic growth there, but that did not happen.
Instead, China raised reserve requirements affecting banks, but not benchmark interest rates impacting the wider economic activity, easing worries of a slowdown in top consumer China. On Tuesday, independent cotton analyst Mike Stevens in Mandeville, Louisiana noted that Chinese yarn market production for November posted its second highest gain on record, and was just under August's all-time high.
"Things obviously are not slowing down in China. In response, Chinese prices were higher overnight spilling over into New York trade," said Stevens. Brokers also noted that overnight business left a large gap on the March cotton chart, ranging from Monday's high at $1.4097 to $1.4295 Tuesday's low.
Some brokers pointed out cotton fast-paced gains of 34 cents over the last 2 weeks might be setting the stage for a sharp correction. But Stevens added, "Only a close today back below yesterday's $1.4097 high would give even the slightest hint that a pullback might be imminent."