April 8 – The roller coaster may best define what we see this week in the markets. The focus was largely on the worst-case scenario on Thursday and Friday of last week, while this week’s markets are mixing in some “what-if” scenarios to the contrary, although fear is still very much present. It’s ironic, and perhaps significant, that stock futures were up sharply overnight despite another barrage of negative headlines from the wire services as traders contemplate the possibility that things might not be all gloom and doom, although there are still reasons for concern. The VIX is still trading at a historically high level near 40, although that is well below yesterday’s high of 60. The dollar index is trading near 103.0. Yields on 10-year Treasuries are trading near 4.22% this morning, putting them back above where they were just ahead of the start of the tariff war, while yields on 2-year Treasuries are trading near 3.82%. Crude oil prices are consolidating higher near $61 per barrel this morning, while the grain and oilseed markets posted solid gains overnight.
Up to 70 countries have contacted the White House seeking to negotiate tariffs lower, although China isn’t one of them. Seeking negotiations is still a long way from having resolution, but this is an important first step toward lowering global tariff rates, along with non-tariff trade restrictions, in a way that could spur global economic growth. The risks of an escalating trade war continue, but the early signs continue to point toward the Trump tariff leverage working to bring down trade barriers. It will certainly be complicated by President Trump’s refusal to budge on his own 25% tariffs on steel and aluminum, and his insistence on 25% tariffs on autos (although I believe there is room for negotiation on that one), but the talks are beginning, nonetheless. As such, I anticipate a roller coaster of volatility to continue in the days ahead, where various headlines drive market emotions to swing one way, and then the other. But this roller coaster action can create a bottoming action, although downside risks still remain for now.
China is standing its ground. It’s taking a big risk in doing so, as Fitch has already lowered its credit rating (last Thursday) due to its weak economy and rapidly rising debt load. President Trump warned last week that he would escalate tariffs on any country that retaliated with higher tariffs of its own. China stood alone to do so, adding another 34% to its existing tariffs for all goods and products coming from the United States. President Trump warned yesterday that he would add another 50% tariff to China tomorrow if China failed to revoke that retaliatory tariff. Furthermore, he stated that he would cutoff all talks that China had requested if they failed to revoke those retaliatory tariffs. China’s Ministry of Commerce responded to Trump’s threat by vowing to fight to the end. That response aligns with China’s Ministry of Foreign Affairs’ statement last month: “If the U.S. insists on a tariff war, trade war, or any other war, China will fight to the end.” This suggests that China sees this as a fight for its very existence. Its stated desire to have the world’s number one economy and military appears to have no “Plan B.” It views Trump’s desire to get China to remove its tariffs and other trade restrictions as a threat to its very existence, for which it says it is willing and prepared to fight.
Yet, it left a trade door open. China will allow U.S. products to continue to enter the country through its “free port” in Hong Kong. This allows it the flexibility to mitigate tariff impacts through transshipment through Hong Kong. Thus, China has softened its stance a bit while maintaining its appearance of standing up to President Trump. Meanwhile, China is focused on maintaining its image at home. It poured large volumes of money into the stock market following yesterday’s collapse, that seemed to catch it by surprise. The Shanghai Composite Index rose 1.58% today, while the Shenzhen Composite Index was up 0.64%, as money flowed back into the markets following yesterday’s sharp collapse. The source of that buying was state-backed funds. Chinese state funds were active buyers in today’s trading session. China’s sovereign wealth fund Central Huijin Investment reportedly bought exchange-traded funds starting on Monday, sending a message that it would continue to do so if necessary to maintain the stability of the capital markets. Other state-backed assets joined in the buying today to lift the markets. This does not come without a cost. China’s debt obligations continue to grow. Furthermore, China is allowing its currency to devaluate to offset the tariff costs, sacrificing its desire to maintain the yuan as a strong alternative to the dollar in global trade.
China granted preliminary approval to 97 corn genetically modified corn and two soybean varieties as it seeks to grow its way out of food import dependency. Meanwhile, global demand for corn remains quite strong, with basis firming both here and in Brazil. Wheat traders are focusing on declining crop ratings in the southern Midwest following the weekend flooding that creates a disease threat for the crop, while areas of the Plains, and Russian wheat belt continue to face dryness concerns. The grain and oilseed sector has largely received the short end of trades the past few years, but the food-based commodities suddenly look appealing to money managers.
