June 9 – Stock futures traded modestly higher overnight ahead of key inflation data expected to be released mid-week, with investors encouraged by anticipated trade talks in London today between negotiators from China and the United States. The VIX is trading near 17 this morning, which is just above Friday’s three-month low, while the dollar index trades near 99.2. Yields on 10-year Treasuries are trading near 4.51%, while yields on 2-year Treasuries are trading near 4.02%. Crude oil prices are modestly higher, testing two-month highs, while the grain and oilseed sector traded mixed to weaker overnight.
Both China and the United States sent their top trade officials to London today to follow up on the 90-minute phone call between President Trump and President Xi late last week. Trade negotiators will seek to find some common ground at a time when common ground is becoming increasingly difficult to find between the two world superpowers. The two powers have found something that they can agree on each time that they’ve had a significant meeting, and that may be true again today as well. But the differences separating the two are vast, and we should be wary of expecting those differences to be settled any time soon. China and the United States are on two different paths driven by vastly different value systems, and those paths are on a collision course. The U.S. economy is built on the private sector, where government seeks to create an environment where private enterprise can thrive in both the invention and development of new goods and technology, and where its citizens have the freedom to express themselves as they wish, while pursuing their dreams as they wish. The Chinese economy is built on a government-driven economy, in which government controls business, as well as many aspects of one’s personal life. This was recently exemplified when Chinese authorities who were disappointed with China’s economic output ruled that all major businesses – private and state-owned – should have communist party leaders on board to ensure innovation and efficiency. That’s the very opposite of what we’d do in the States to encourage productivity.
China’s economy and its military are built in part on the trade surpluses that it enjoys with many regions of the world that pump revenue into the development of both. One of the biggest of those trade surpluses is with the United States, where China seeks to maintain access to the massive U.S. consumer market. China is still dependent – much to its own frustration – on imported raw commodities in order to sustain its economy, but it has been trying to wean itself off of dependency on U.S. commodities. It doesn’t want to be dependent on U.S. commodities, to be beholden to us, as we are to China for access to rare earth minerals, but it does want access to our vast consumer market that provides much of the revenue for developing its economy and its military. As such, any agreement that might eventually be reached between the two nations would likely include a commitment to purchase U.S. Ag and Energy commodities in exchange for favorable access to the U.S. consumer market. However, President Trump also understands that China’s desire to access our consumer market is the greatest leverage he has for getting concessions from China in other more critical areas dealing with national security, such as the rising tensions over who will control the Indo-Pacific region where significant global trade passes.
A May 11 meeting between negotiators on the shores of Geneva Lake yielded an agreement that both sides would roll back the reciprocal and retaliatory tariffs for 90 days, which created a surge in demand for Chinese goods from U.S. retailers. However, that agreement also included Chinese concessions to offer export licenses for rare earth minerals to the United States for the production of electronics. Last week’s phone call between Trump and Xi seems to have resulted in progress on those export licenses, although China continues to step up monitoring of the movement of those minerals, not desiring them to be used for the development of military equipment in the United States. As such, we’ll likely see some movement of rare earth minerals, but the underlying issues are not likely to be settled any time soon. Furthermore, China will likely see any agreements reached as having a termination once President Trump is no longer in office.
Commodity traders continue to monitor the escalating war in the Black Sea Region, where Russia and Ukraine have significantly increased the strategic attacks. The risk of this war impeding the movement of key food and energy commodities may still be below 50%, but those risks are ratcheting up. Last week’s Ukrainian attack on the Kerch Bridge that connects Russia to the Crimean Peninsula failed to bring down the bridge, but it did substantial damage to some of the pillars. Ukraine has now demonstrated its desire to bring down this bridge, which could close off the Kerch Strait, through which 30% of Russia’s wheat exports flow, along with an estimated 1.5 million barrels per day of crude oil. Risks that Russia might escalate its attacks on Ukraine grain export facilities are also rising. Thus far the primary response has been some short covering, just in case the risks for commodities increase further.
