Today's Video Perspective: Commodities Face Pivotal Tariff Week
July 8 – Stock futures were quietly mixed overnight as Wall Street learns more about how the Trump Administration plans to approach the end of the 90-day pause to reciprocal tariffs. The VIX remains low near 17, while the dollar index is trading higher near 97.7. Yields on 10-year Treasuries continue to rise, trading near 4.43%, while yields on 2-year Treasuries are trading near 3.91%. Crude oil prices are quietly mixed, while the grain and oilseed markets saw follow-through selling from yesterday’s big selloff.
President Trump sent letters to 14 nations telling them that they face higher tariffs starting August 1 due to their failure to reach agreements with the United States during the 90-day pause. Those rates varied from 25% for Japan and South Korea to 40% for Laos and Myanmar. Several of the above 14 countries indicated that they plan to continue negotiations in hopes of reaching a deal prior to August 1. As such, global stocks largely took the news in stride, with investors believing that we will see more trade deals that avert the higher rates in the weeks ahead. The European Union still remains optimistic that it can reach a deal by August 1. However, moving the target date back by several weeks means that we’re less likely to see a multitude of trade agreements now, as each country now has a new date to leverage. Getting the “best” deal possible is seen as a higher priority than getting an early deal done.
Chinese officials took note of the newly announced tariffs, doing their own analysis of what they may mean for China’s relationship with the United States. President Xi Jinping frequently threatened retaliation toward countries that signed deals with the United States that hurt China. Yet, that’s what its neighbor Vietnam did. Thus far, there’s been no public steps of retaliation taken, but there have been movements behind the scenes. Vietnamese Prime Minister Pham Minh Chinh met with China’s Premier Li to discuss strengthening trade and investment ties when they were both at the BRICS summit last week. It’s believed that China is holding discreet conversations with Vietnam with a very moderate retaliatory response expected. China needs to send a message to other countries, while protecting an important relationship with Vietnam. China was angered by the 40% tariff on transshipments in Vietnam’s agreement with the United States, but Chinese analysts also pointed out that the 40% rate on pass-throughs is still 2 – 3 points lower – depending on how you calculate them – than the U.S. direct tariffs on China.
The 14 countries that received letters also appear strategic to Chinese analysts, because they are primarily China’s neighbors, or are countries with which China has significant trade relations. That could be intentional, or it could merely be coincidence, since we do so much trade with that part of the world. That said, I’ve expected one of the primary objectives of the tariff war would be to get trade agreements that help President Trump to contain China, and that appears to be the case. President Trump appears to be asking these countries to take sides – either align yourself with China, or with the United States. Trump saved some of his highest tariffs for Southeast Asian countries. This area is one of China’s top export targets, but in many cases it is so that products can pass through it to the United States. President Trump is pushing this agenda at a time when he has a lot of momentum behind him following a successful strike on Iran’s nuclear facilities. Both Russia and China saw Iran as a key strategic partner, and they had pledged their backing to Iran. However, the U.S. strike on Iran’s nuclear sites resulted in a deafening silence from both Russia and China, and other nations took note of that. This came as NATO threw its support behind Trump by committing to much higher levels of financial commitment, while G-7 leaders threw their support behind him as well. My point here is not to draw attention to President Trump, but rather to describe the realignment process that is currently occurring – to recognize that shift that is taking place in geopolitical alignment that will impact policy and trade going forward. The primary question now is, how will Russia and China respond?
USDA rates this year’s U.S. corn crop at 74% Good to Excellent – one of the highest on record for early July – indicating that this year’s crop currently has above-trend yield capability. Iowa’s crop is rated 86% Good to Excellent. Meanwhile, the soybean crop was again rated at 66% Good to Excellent; holding there for much of the past month. The normal seasonal tendency is for these ratings to decline, but instead soybeans are holding steady, and corn ratings are rising. Every fund manager trading these markets has yield models that they use to shape their trading decisions. Those yield models are generally putting this year’s corn yield somewhere in the mid- to upper 180s bushel per acre range, which is well above USDA’s current yield of 181 bpa. I do not expect USDA to change its yield in the WASDE crop report on Friday, but rather to wait until August to do so. A lot can happen between now and then to change things, but for now, fund managers are pushing prices lower to create more demand to absorb the anticipated growth in demand. The 15-day outlook remains seasonally mild with periodic showers, suggesting that we will likely continue to see the models remain above trend for at least the next couple of weeks.
