Eoin Treacy's view

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Trade war concerns intensified now with US President Trump’s comment to “consider whether US$100 billion of additional tariffs would be appropriate” in response to China’s proposal to impose US$50 billion tariffs against US aircrafts, automotive and soybeans. At the time of writing as of 6th April 2018, US stock index futures and growth-related commodities fell immediately while safe haven demand into gold rallied the yellow metal. 

IMF commented that trade wars “not only hurt global growth, they are also unwinnable” while World Bank chimed in that protectionism can “disrupt worldwide supply chains and affect long-term productivity”. According to Bloomberg Economics, a full-blown trade war may cost the global economy $470 billion (or about 89.3% of total US imports from China in 2017). Note that both US and China have substantial trade exposures, with US’ total trade with China at 16.9% of its total trade with the rest of the world, vice versa China’s total trade with the US at 14.3%. 

Should trade tariff proposals turn concrete, we opine that growth-related commodities could potentially trend similarly to a growth-recessionary year (crude oil, base metals: 10% to 30%), while safe haven demand into gold will lift the yellow metal beyond $1,600/oz. Impact on agricultural will likely be mixed, as crude palm oil could find favor with Chinese importers, while soybean prices could potentially fall as demand slackens. 

At least for now, the trade tariff threats are merely… just threats. Risk appetite could eventually recover should it stay as a war of threats (and executive orders). Watch out for potential huge swings in the commodity market (as well as the overall financial markets) should things escalate further.

Fears about trade wars are ebbing and flowing with optimism a détente will be reached one week superseded by fears tit-for-tat measures will deteriorate further the next. The banning of ZTE from selling phones in the USA is an escalation while the potential for Mnuchin to visit China is seen as a positive. What this suggests, at least to me, is this is an ongoing situation which is still some way from a resolution. If that is the correct assumption then it is not ideal for investor sentiment.

The possibility for weakening sanctions on Russian aluminium resulted in considerable volatility for the metals markets over the last couple of sessions. The price spiked higher from earlier this month but pulled back sharply over the last three sessions and has so far given up about half the earlier advance.

Nickel, which had been playing catch up, also pulled back sharply and is now testing the upper side of its underlying range. 

Gold has also pulled back from the upper side of its range over the last few sessions and will need to continue to hold the $1300 level if consolidation is to continue to be given the benefit of the doubt.