April 3 - U.S. stocks posted their largest drop since the pandemic today as fear roiled Wall Street. That fear spread to the commodities as well, with money flowing into the relative safety of government securities. Crude oil continued to reflect that fear of an economic collapse that would require less energy, but the grain markets found value buyers to lift prices into positive territory at times. Today's market reflects a sorting out of emotions, balancing them with perceived supply and demand fundamentals. That volatility will likely remain with us in the days and weeks ahead, with markets moving on headlines. Look for some countries to quickly come to the negotiating table, while others dig in their heels, with the markets moving with each headline, depending on which way it leans.
President Trump sees tariffs as a "beautiful word." He sees three primary uses for tariffs - as a negotiating tool, as a revenue source, and as a tool to use to protect national security. We've seen him frequently use tariffs to drive a trading partner to the negotiating table. I see his 25% tariffs on Canada and Mexico - which remain waived for all commodities covered by the USMCA trade agreement - as a negotiating tool. The fact that President Trump left them unchanged was encouraging to me, as I believe it is an indication that negotiations are progressing well with both Mexico and Canada. I remain cautiously optimistic that those 25% tariffs will eventually be lifted. On the other hand, the 10% base tariff placed on all countries I see as a revenue tool that Trump is using to help fix our nation's fiscal deficit problem. One can debate whether that is a legitimate use of tariffs, but what matters here is that Trump believes it, and he's the current president. The 10% tariff is less likely to change under this administration, and both Canada and Mexico "might" be subject to that base tariff as well once the above 25% tariff issue is settled, although even that could be negotiated away if Trump gets their full support in containing China - preventing China from bringing products into the States through their countries to bypass our tariffs and sanctions.
The 25% steel and aluminum tariffs are part of what Trump sees as a national security interest, in my opinion. So, when Canada says that they are willing to go to zero tariffs if the United States does the same, their primary interest is the elimination of the steel and aluminum tariffs. Those are basically in the "nonnegotiable" category with this Administration, in my opinion. I believe that the proposed port fees for Chinese built / flagged ships also fall into that category, although I expect a more pragmatic approach to eventually emerge. The 25% tariffs on imported cars also fall into this national security category in my opinion, although that one is harder to defend. It does garner votes from the labor unions though, as does the port fees proposal.
I'm a bit more optimistic today about the possibility of a trade agreement with China. President Trump put a 34% tariff on it, on top of the 20% already in place. President Trump still wants to "contain" China from being an aggressive force, but the 54% tariffs should help to bring China to the negotiating table. It took 13 face-to-face negotiations over several years during Trump 1.0 to get a trade agreement that China didn't live up to. He increased the leverage this time. China's economy is much weaker this time around. China is already building up significant debt to keep its economy afloat. China exported $439 billion worth of consumer goods to the United States in 2024. A 54% tariff will kill that trade in a way that it cannot stimulate its way out of, leaving its economy quite vulnerable. It has already countered with 10 to 20% tariffs on U.S goods that were already uncompetitive in the Chinese market prior to that. Higher counter tariffs won't change that. I believe this will force China to the negotiating table. However, its escalation of military activities around Taiwan could complicate matters, risking that it turns to war to divert attention away from its domestic economic problems.
Stocks came off their lows midday, but they remain down 3 - 5% on the day currently amid fears over the domestic and global economy. The VIX surged above 29 initially, although it is trading closer to 27 currently. I have observed over the years that it is difficult for any commodity to sustain a rally when fear drives the VIX above 30 unless that asset has strong fundamentals. The dollar index traded to six month lows below 101.3 this morning, although it is off its lows currently. Yields on 10-year Treasuries are trading near 4.05%, after holding support at 4%, while the yields on 2-year Treasuries are trading near 3.73%. Crude oil prices are down nearly 7% on the above-mentioned economic worries, while the grain and oilseed markets are currently one of the bright spots in the commodity sector. Wheat prices are posting modest gains at this hour, while corn posted modest gains earlier in the session before slipping back into the red at midday. Sharply lower soyoil prices are weighing on soybeans, along with China worries, although the China tariffs aren't really an issue for another 4 - 6 months, as China has plenty of cheaper Brazil soybeans to buy in the meantime, regardless of tariffs. A sharply lower stock market weights on the protein sector as well, with the beef market particularly worried about losing the consumer in this tariff economy, along with the possibility of losing some export markets.
Fear should ease in the days ahead, with value buyers emerging to take advantage of the break, although headlines will likely continue to be a risk to these markets for some time to come. But today's response in the grain markets is an encouraging first step that we can get back to trading supply and demand fundamentals.
