April 9 – And the saga continues. Much of the world may be asking to negotiate lower tariffs, but China is not, leading to further escalation of the tariff war. Stock futures tumbled on the news, with the VIX pushing higher once again, trading as high as 58, before easing back to trade near 52 currently. The dollar index dropped hard overnight to trade near 102.0. Yields on 10-year Treasuries surged above 4.5% at one point, reaching nearly seven-week highs, while they’re currently trading near 4.38%, while yields on 2-year Treasuries are trading near 3.77%. Note the sudden rise in the yield curve over the past day or two. Crude oil prices fell to fresh four-year lows on the China news, trading in the $55 per barrel area at one point. Meanwhile, the grain and oilseed sector held up well to the strong downdrafts in the outside markets.
President Trump increased the tariff on Chinese goods to 104% at midnight last night, keeping his promise to escalate tariffs on any country that retaliates against his reciprocal tariffs. China responded by raising its retaliatory tariff to 84%. In the end, it matters little whether the tariff is 34%, 54%, or 84% - it pretty much shuts down trade at any of those levels. It’s all about saving face now and looking strong. Canada and Europe indicate that they too are working on retaliatory tariffs, although they have also both indicated that they would first seek a negotiated solution. The Trump Administration has a long list of countries to negotiate with – some say that roughly 70 countries have asked to negotiate lower tariffs. Trade agreements can be a thousand pages long, or longer. As such, they take considerable time. Now multiply that times 70 or more. It’s going to take time.
But President Trump may not have time. He needs to see some successful negotiations completed soon. Wall Street needs to see some successful negotiations soon. I stated yesterday that this week would likely be a week of roller coaster trade, based on the flow of headlines. That “can” turn into a bottoming action, but only if the previous lows hold. That will be one of the keys to market sentiment each time that negative headlines take stocks lower. I stated last week that it’s difficult for any asset to sustain a rally when the VIX Is above 30 due to high fear levels, unless that asset has a strong story. It’s noteworthy that the grain and oilseeds are holding their ground, even though the VIX is trading in the 40s and 50s. Perhaps money managers believe that the food-based commodities may be least likely to see widespread retaliatory tariffs that would hurt demand, although I wouldn’t necessarily bank on that. This is indeed a pivotal week for the markets if we’re going to reassure the consumer.
The Section 301 port fee proposal has the potential to be even more disruptive than the tariff war. I’ve previously outlined how fees of $500,000 to $1.5 million would be assessed to Chinese-built vessels and operators with Chinese-built vessels in their fleet at each port call. I’ve previously stated that I believed that the Trump Administration would move forward with some type of Section 301 proposal, but that it would be more pragmatic when finally released. That was confirmed on Tuesday when U.S. Trade Representative Jamieson Greer testified before the Senate Finance Committee on Tuesday. He stated that the administration is making revision to the plan based on public feedback. Those revisions are expected to be based more on vessel capacity, while also easing back on fees for ships carrying agricultural exports. The uncertainty of these potential fees already has shippers adding clauses to their contracts stating that the purchaser of products being hauled will be responsible for any potential port fees encountered, while making some shippers reluctant to take on contracts involving U.S. ports. The Wall Street Journal also reports that two big European container ship operators put a hold on 30 orders for new ships at Chinese yards, looking to move those orders mainly to Korean and Japanese yards.
U.S. Secretary of Agriculture Brooke Rollins told reporters she is setting up the infrastructure for payments to farmers if necessary if the tariff war creates undo hardship on the farm sector. Others in Washington, D.C. have confirmed that discussions of an assistance plan for farmers have been occurring. It’s still too early to know what the scope of such a payment program might be, but the discussions are taking place. However, the timing of such payments, if they happen, is likely months away from occurring. In the meantime, cash basis for corn and soybeans is surging in Brazil, as farmers there anticipate benefiting from the Trump tariff war with China. In reality, the trade picture between China and the United States for corn, soybeans, wheat, and grain sorghum has changed little today from what it was a month ago, or even 6 months ago. China has been moving away from dependence on U.S. Ag commodities for years, and it continues to do so. It will still find ways to buy what it needs from us – it waived tariffs in Trump 1.0 to buy what it needed – but it will continue to divest from dependency on the United States. Currency exchange rates are driving that, but geopolitical differences are as well. China has little incentive to send its money to a country that it has stated that it wants to topple from the top of the economic mountain.
