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Trade Fears Could Pressure Commodity Prices

Trade Fears Could Pressure Commodity Prices
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Friday, 22 June 2018 09:32 AM Current | Bio | Archive

We have seen a serious escalation of the trade tension between the U.S. and China.

The U.S. administration has intensified its rhetoric against China, stating that if China retaliates against the new U.S. tariffs on July 6, the U.S. is prepared to slap additional 10 percent tariffs on up to $400 billion of Chinese exports to the U.S.

With no negotiations in sight at the moment, despite some White House officials seem to be trying to restart talks with China to avoid a trade war before U.S. tariffs on Chinese products take effect July 6, the chances are growing for a further escalation of the trade conflict between the U.S. and China.

Investors could do well keeping in mind that on June 30 the U.S. is also due to announce its plan to restrict Chinese investments into the U.S. and to limit exports of U.S. tech products to China.

It’s a fact that from the Chinese side there is very little trust after the U.S. turned its back on the declared truce in their trade dispute during the previous month.

President Trump has previously made sudden changes in tactics, when we think how he reversed his planned actions completely on North Korea, and how this week he made another U-turn on immigration.

I still think that the chances for President Trump changing his position are rather slim and I wouldn’t give it a more than 20 percent chance. 

Besides all that, the European Union (EU) has now also started a 25 percent tariff on 2.8 billion euros or about $3.3 billion of U.S. goods, which are jeans, motorcycles, bourbon and several commodities, in response to the U.S. tariffs on steel and aluminum that are imported from EU countries.

You don’t have to be a pessimist to consider that the action of the EU today may well trigger countermeasures from President Trump as he did with China, which could include tariffs on European car exports, whereby the German car industry would be hit the most of all, and by far, and that then causing another retaliation round from the EU and so on, and on.

By the way, several emerging-market countries like Turkey, India and Russia have recently also adopted countermeasures to the U.S. steel and aluminum tariffs.

Realistic thinking obliges us that if the trade frictions between the U.S. and China would escalate further, especially in the event that a total of $450 billion dollars of U.S. tariffs would "effectively" be imposed on China, and China retaliates with measures against U.S. trade in a similar way, then exports as well as business confidence would take a serious hit.

There is no doubt whatsoever that such a scenario would negatively impact investments and consumer spending, not alone in the U.S., but also globally.

If all this would unfold, this could lead us to a more restrictive global trade regime that would be felt most acutely in the so-called surplus countries like China, Germany but also in the manufacturing emerging economies.

At this moment, a contraction of global growth of between 0.25-0.50 percent is estimated.

Remember, this week at the central bankers gathering in Portugal, Fed Chair Jerome Powell said that trade tensions “could cause us to have to question the outlook”, while ECB President Mario Draghi said that “for the first time we are hearing (from business leaders) about decisions to postpone investment, postpone hiring, postpone making decisions.”

Also, the Chinese central bank has signaled a possible monetary policy ‘easing’ that could come perhaps as early as this weekend in response to the possible hit from the trade frictions with the US.

Investors could do well keeping in mind that further escalation creates a downside risk to global commodity prices. Prices on industrial commodities, like aluminum and steel, and agricultural commodities, like soybeans, would suffer directly from the imposed tariffs, which would reduce global demand for these commodities.

If a further escalation would lead to a significant setback in the total volume of global trade, which would mean a “real trade war,” then oil prices would be also at risk as fuel demand for shipping would take a hit.

For taking positions on emerging markets, I would prefer to wait and see what happens on or before July 6 before to start "re-evaluating."

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Investors could do well keeping in mind that further escalation creates a downside risk to global commodity prices.
trade, tensions, trump, investors
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2018-32-22
Friday, 22 June 2018 09:32 AM
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