May 23 – Stock futures tumbled this morning as the trade war heated up once again, based on new tariff threats from President Trump targeting the European Union and Apple. His comments resulted in a sharp drop in both the equities, and in many commodities as well, as they raised fears of a global slowdown in the economy that would reduce demand. The VIX spiked to trade above 25 following the comments, while the dollar index rallied to trade near 99.4 as the euro fell in the global currency market. Yields on 10-year Treasuries dropped to trade near 4.49%, while yields on 2-year Treasuries are trading near 3.94%. Crude oil prices are nearly 1% lower following the comments, while the grain and oilseed markets are also mostly lower. Traders overall are positioning for the three-day Memorial Day holiday weekend, for which the markets will be closed Monday, while the headlines continue to flow out of the White House.
President Trump posted on social media this morning that the European Union was first formed primarily for taking advantage of the United States in trade, and therefore it has been very difficult to deal with in trade negotiations. As such, he is recommending a straight 50% tariff on goods coming from the EU starting on June 1 as he seeks to leverage the higher tariffs to get the EU to negotiate. The euro fell on the post, while stock futures and many commodities sold off, as fears of another escalation in the trade war sent buyers to the sideline. Treasury yields also fell on fears of a slowing economy as the tariff war heats up once again. President Trump also threatened 25% tariffs on Apple iPhones not produced in the United States, raising additional concerns for the tech market. It’s still not clear whether the president has the authority to implement a tariff on an individual company, but the bottom line is that more uncertainty has been re-introduced to the markets ahead of a three-day holiday weekend.
The People’s Bank of China cut interest rates this week to stimulate China’s economy amid the trade war. The PBOC cut both its one-year and five-year Loan Prime Rates by 10 basis points, while providing guidance to major state banks to lower their deposit rate floors by 5 – 25 basis points. One-year deposit rates dipped below the 1% level for the first time in decades, seeking to discourage households from saving, while encouraging consumer spending to combat deflationary pressures in China. Household savings added another 7.8 trillion yuan in the first four months of this year as consumers pulled back spending amid the uncertainty of the trade war. Consumer spending was already at risk amid the poor performance of China’s property market in recent years, but they pulled back even more when they were told that the United States had declared war on China with its tariffs. As such, it’s doubtful that this drop in interest rates will make very many consumers excited about spending money, particularly since their properties overall continue to lose value. Property is where the typical household maintains its wealth.
One of the ways to monitor China’s economic health is through its power data. Power use in China grew by 4.2% year on year in April, down from 4.3% in March, but better than anticipated. Industrial use rose 3% on the year, which is its lowest pace in five months, and down from 3.8% in March. However, service sector power use rose 9% on the year, up from 8.4% in March. This indicates that the service sector has been able to offset some of the pressures on the manufacturing sector caused by the tariffs.
China imposed 100% import tariffs on rapeseed meal originating in Canada as of March 20, but it still imported 173,502 metric tons of the meal in April, up 27% on the month and up 3% on the year. Rapeseed meal imports from all sources totaled 298,587 metric tons, which was the highest monthly total in years. This could give us some insight into how China may handle its soybean needs – and possibly other commodities as well – amid the current tariff war. We’ve already seen Sinograin – China’s state grain buying agency – purchase and take shipment of U.S. soybeans during the current trade war. As a state agency, it is essentially immune to the retaliatory tariffs – the state paying itself the tariffs. We can’t confirm it, but I anticipate that the rapeseed meal purchases from Canda in April were also by Sinograin. We’ve also seen China very quietly waive tariffs on products that they needed, even those coming from the United States. I still think that we’re vulnerable to losing soybean sales to China, along with other commodities, but the losses may not be as bad as some fear, depending on the availability of alternative sources.
Corn and soybean prices were near unchanged early this morning, until the above tariff announcements from President Trump, when they came under selling pressure. We still anticipate Midwest weather to be a greater focus once we turn the calendar to June, but today traders simply want to limit their risk exposure ahead of the three-day holiday weekend when the headlines are expected to continue to flow. Wheat prices had a nice rally this week, reflecting good buying interest, but continuing the rally would also start to price us out of the market once again.
