March 3 – Stock futures firmed overnight, despite expectations that the tariff tit-for-tat will escalate tomorrow. Meanwhile, agricultural commodities came under pressure on ideas that sector will suffer the brunt of a Chinese retaliatory strike. The VIX is trading near 20 this morning, while the dollar index trades near 106.8. Yields on 10-year Treasuries are trading near 4.25%, while yields on 2-year Treasuries are trading near 4.03%, after settling just below the psychological 4% level on Friday. Crude oil prices are modestly higher – trading near that $70 level that previously has generated bargain-buying. The grain and oilseed sector continued to see fund selling in corn and soybeans overnight on fears that they will be the target of Chinese retaliatory actions this week.
Liquidation continued in the grain and oilseed sector overnight amid reports out of China that it is considering targeting that sector with retaliatory measures if President Trump proceeds with an additional 10% tariff on Chinese goods beginning tomorrow. President Trump announced last week that he would move forward with the paused 25% tariffs on Canada and Mexico on Tuesday as the 30 day pause comes to an end, and that he would add another 10% tariff on the 10% already in place since February 1 on China, bringing the new tariff up to 20%. That move was puzzling to analysts – toward helping to seal their borders with the United States from the flow of illegal migrants and drugs.
The above unfolded at the same time that a very unusual diplomatic spat blew up in the White House between Ukraine’s President Zelenskyy, U.S. Vice-President Vance and President Trump. The blow up looked very strategic to me, with Vance stepping out of his ordinary role to challenge Zelenskyy while Trump initially remained an observer, before eventually stepping into the fray. Zelensky appeared ready to use this opportunity before the press to push his case for continuing the war, which Trump and Vance apparently anticipated and cut him off. What’s at stake? Zelenskyy will lose his country without support from the United States, but it won’t be with the NATO membership that he seeks. That would likely precipitate World War III. Instead, Trump is pushing him to a deal that would give the United States access to Ukraine’s vast reservoir of rare earth minerals, easing the stranglehold that China currently has on the world supply. Russia remembers that Trump killed Russian Troops during his first term when he fired cruise missiles into Syria. That led to Russia leaving Syria at the time. Access to Ukraine’s rare earth minerals would put vital U.S. interests – including personnel – inside of that country, leading Russian President Putin reluctant to be aggressive against Ukraine, but it would also ease his fears of a NATO attack on him if Ukraine is not a member of NATO. Thus, Ukraine would get peace, and we would get access to the rare earth minerals that we need, allowing us to further isolate China.
In the end, it’s all about containing China. I believe that is Trump’s ultimate goal with much of what we’re seeing play out in the headlines. I go back now to the 25% tariffs on Canada and Mexico set to go into effect tomorrow. I mentioned last week that I felt this also had to do with containing China, and over the weekend we heard that Mexico is considering matching U.S. tariffs on China – something that we apparently had pressured it to do. Mexico has become a channel through which it could funnel its goods into the United States to avoid U.S. tariffs, and that’s also been true to some extent for Canada. The United States is reportedly asking Canada to follow Mexico’s lead in doing so. My guess is that the 25% tariffs would suddenly go away if both Canada and Mexico would agree to do so, increasing the pressure on China.
That brings us back to China and the 20% tariffs on it, especially if Canada and Mexico match those tariffs against China. China’s initial response to Trump’s 10% tariffs on February 1 was relatively small. It didn’t want a trade war – it couldn’t afford a trade war – and it still cannot afford a trade war. It’s economy is too weak right now. A trade war could break the bank similar to how President Regan broke the bank of the U.S.S.R in the 1980, leading to its breakup. Look for a different response tomorrow. During Trump 1.0 China directed its retaliation against the U.S. agricultural sector that had been a major political base for Trump. Chinese state-backed media reported today that authorities are considering doing the same this time around as well. During Trump 1.0 it could afford to sacrifice purchases of U.S. soybeans because its demand was slashed due to African Swine Fever killing up to two-thirds of its hogs. This time it can afford to do so because Brazil is producing a record to near-record crop, and currency exchange rates make it cheaper than U.S. supplies anyway. Yet, it will be reported that it’s not buying U.S. soybeans due to Trump’s escalated trade war.
The same is basically true for Chinese purchases of corn and wheat. It has cheaper alternatives elsewhere. Where it would be felt more would be lost purchases of U.S. pork and beef. China loves face-to-face negotiations – relationship. It forced the Trump Administration into 13 such meetings before a trade agreement was reached during his first term, which dragged the whole process out to several years. Trump appears to be turning up the heat to get a quicker deal this time around, but that still may mean that this trade tit-for-tat goes on for up to six months to a years, leaving the commodity world in limbo. And that is why we continue to see liquidation in the Ag sector, particularly the commodities most notably identified with Chinese trade, while energy prices are already at significant lows.
