March 31 – This is a pivotal week for the markets. It’s the week that we’ve been anticipating for a long time. You might even say that it’s a week that Wall Street has been fearing for a long time. Are its fears well founded? Will the events of this week play out worse than feared, or perhaps will the fears prove to have been overblown? All are possibilities. On Wednesday we expect to finally learn more details about President Trump’s reciprocal tariff plan – country by country. We should also hear this week the fate of President Trump’s 25% tariffs on Canada and Mexico, while we already anticipate that the 20% tariffs on China will remain in place. We may also hear of new secondary tariffs on countries that buy Russian crude oil. On top of this, the major Ag commodities get two critical reports known for their market-moving surprises at midday today to start the week off. To finish off the week, we will get the monthly jobs report, which should begin to show some of the impact of the Federal employee layoffs, as well as corporate pullbacks due to the uncertainty of the tariffs. Yes, this could very well prove to be a very pivotal week for the markets. And by the way, it’s also the end of the month and end of the fiscal quarter today.
Stock futures came under additional pressure overnight as traders anticipate the potential negative implications of this week’s events. The VIX rose to trade above 24 for the first time since March 13, reflecting the heightened anxiety today, while the dollar index traded near 104.1. Yields on 10-year Treasuries are trading near 4.21%, while yields on 2-year Treasuries are trading near 3.88%, as investors seek the relative safety of government securities. Crude oil prices are modestly higher this morning, while the grain and oilseed markets are mixed to weaker.
Might tariffs on China have something to do with Panama? President Trump placed additional 10% tariffs on China on February 1, indicating that it was to leverage China to do its part to reduce the flow of fentanyl and its components into the United States. He doubled that to 20% 30 days later. This week we should learn more about potential reciprocal tariffs on China, but last week he hinted that he might reduce tariffs on China if it approved a plan for a private buyout of TikTok. Meanwhile, President Trump would like to take back control of the Panama Canal. The Panama Canal has relatively low value to China from a trade standpoint, other than trade that it does with the United States. But the Canal is strategic to the United States, not only for trade, but also for quickly moving military assets from the Atlantic to the Pacific if a military conflict were to break out in the Pacific Arena (i.e. the South China Sea). BlackRock inked a deal to purchase 43 ports worldwide from Hong Kong-based Hutchison, including two ports on the Panama Canal. This had the appearance of private equity helping Trump reach his objective. But China is threatening to block the deal. Might we now see approval of the deal as part of the negotiation for reducing tariffs on China, along with the above-mentioned TikTok issue?
China’s manufacturing purchasing managers index hit a one-year high of 50.5 in March, reflecting very modest month-on-month expansion. That aligned with market expectations, and it reflected the impact of government stimulus for the sector. The new-order subindex rose to 51.8, while overall production came in at 52.6. However, the employment subindex fell to 48.2, indicating contraction in March. The non-manufacturing PMI firmed to 50.8, but the subindex for employment dropped here as well, falling to 45.8, reflecting worries about future demand. This indicates more challenges for China’s economy – and therefore more need for stimulus that puts additional debt burden on the government in an economy dependent on government. China’s Ministry of Finance plans to issue 500 billion yuan ($69.7) of special treasury bonds to support large state-owned commercial banks to replenish their capital. Previously, the four largest state-owned banks were reportedly planning on raising substantial funds through stock sales. China’s finance ministry would be the primary buyer of those shares – essentially financing the banks – along with China Tobacco and Telecom giant China Mobile. This too adds to the growing debt burden. This is one more way that Trump’s policies are seeking to “contain” China by forcing it to build up its debt burdens.
President Trump stated Sunday that he was “pissed off” at Russian President Putin, and that he will impose secondary tariffs of 25% to 50% on buyers of Russian crude oil if he believes that Putin is blocking his efforts to end the war in Ukraine. In other words, he will put the tariff on the goods coming into the United States from any country buying Russian oil if he believes that Putin is blocking the peace deal. Those countries would include China and India, among others. He’s already imposed 25% secondary tariffs on countries buying crude oil from Venezuela. But today’s focus in the Ag commodities will primarily be on USDA’s acreage and stocks reports – both of which are known for their market-moving surprises. Then the focus will quickly return back to the above tariff concerns that could dramatically impact demand – either positively or negatively – going forward. Weather in both Brazil and the Midwest also take on increasing importance over the next two months.
