Cocoa Market Rebounds After Sharp Sell-Off: Technical Factors & Low Liquidity Drive Volatility

Market Recap:

Despite its wild ride on Tuesday, April 30, the cocoa market demonstrated resilience. After a significant drop of over 20% earlier in the week, cocoa prices recovered partially. Analysts believe this bounce back was due to technical factors and record-low liquidity in the market, showcasing the market’s ability to adapt and recover.

Key Drivers:

• Prior Rally: Before the recent sell-off, cocoa futures had nearly tripled in value this year, with July London cocoa futures reaching $11,842 per metric ton. Concerns about adverse weather and disease in top producers Ivory Coast and Ghana drove this surge.
• Hedge Fund Activity:  The sharp price increase pushed many physical market participants out and discouraged hedge funds from participating. This left the market heavily influenced by algorithmic trading based on technical signals. The reduced participation of hedge funds further exacerbated the market’s volatility.
• Low Liquidity:  The lack of active participants amplified market movements, causing exaggerated price swings in both directions. On Monday, July, London cocoa futures saw their most considerable one-day loss, falling nearly 15% ($1,773 per metric ton).
• Partial Recovery:  Despite the earlier plunge, July London cocoa futures rebounded on Tuesday, settling up $368 or 3.3% to $11,510 per metric ton. Similarly, July New York cocoa futures rose 3.9% to $9,283 a ton after losing nearly 16% on Monday. This recovery was driven by a combination of factors, including bargain hunting by traders who saw the price drop as an opportunity to buy and a general market sentiment that the earlier sell-off was overdone.

Looking Ahead:

• Tight Fundamentals:  Despite the recent price correction, cocoa supplies remain tight globally, with Ivory Coast and Ghana supplying nearly 60% of the world’s cocoa.

Additional Takeaways:

• The recent margin increase on cocoa futures, implemented by the ICE exchange to manage risk, is expected to reduce market liquidity further. This means traders will need more capital to trade cocoa futures, potentially discouraging some participants and lowering trading volumes. Other soft commodities like coffee and sugar also experienced price declines on Tuesday.

Overall:

Looking Ahead with Confidence: while remaining highly volatile due to low liquidity and a focus on uncertain crop prospects in key growing regions, the cocoa market has shown signs of stability. The price, recovering somewhat from its lows (July London reaching $11,510 per metric ton), instills confidence. However, the underlying concerns about tight supplies will likely keep the market on edge in the coming months, emphasizing the need for continued vigilance.

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