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Perspective: Morning Commentary for February 4

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Perspective: Morning Commentary
 
Arlan Suderman
Chief Commodities Economist

 

 

February 4 – Tariff headlines continue to dominate the discussion on Wall Street, even as we begin to receive key labor data today, with a steady stream of data continuing through the week until it culminates with the monthly jobs report on Friday. Stock futures traded mixed this morning as traders continue to digest the flow of headlines. The VIX eased lower to trade near 18 this morning, while the dollar index is trading lower near 108.4. Yields on 10-year Treasuries are trading near 4.58%, while yields on 2-year Treasuries are trading near 4.26%. Crude oil prices are more than 3% lower at this hour after China imposed retaliatory tariffs that include U.S. crude oil, while the grain and oilseed sector is mostly weaker on the increased China trade tensions as well.

 

China’s initial response to President Trump’s announced tariffs over the weekend was pretty mild, as it merely stated that it would file a complaint with the World Trade Organization. A 10% tariff was imposed on more than $450 billion in Chinese goods coming to the United States as leverage to try to get China to do what it could to stop the flow of fentanyl, and the products needed to produce it from flowing into the United States. The markets were encouraged by China’s approach on Monday, believing that perhaps a trade war had been averted. However, China imposed tariffs on a limited number of imports coming from the United States today, while also putting several U.S. companies on notice for possible sanctions. China placed 15% tariffs on certain types of coal and liquified natural gas, and 10% tariffs on U.S. crude oil, agricultural machinery, large displacement cars and pickup trucks.

 

China’s actions are considered to be fairly measured, as it tries to send a message without escalating the tariff war too much – a war that would certainly hurt it more than its economy can afford currently. The tariffs target $20 billion in U.S. goods coming to China, which is roughly 12% of the overall U.S. imports. Nonetheless, the actions escalated market anxiety a bit – primarily in the commodity sector – raising fears that the tariff battle with China may get worse before it gets better. Even so, China’s measured response thus far suggests that the door is still open for a potential deal. Trump’s stated demand with the current tariffs is to stop the flow of fentanyl, but he’s also indicated a desire to deal with the trade deficit between the two countries. Trump ordered a review of the U.S. China economic relationship on his first day in office. That review is due on his desk on April 1st. It could provide the foundation for further tariff actions against China at that point. The White House confirmed that Trump is expected to talk again with Chinese President Xi Jinping later this week.

 

Momentum is moving in the opposite direction with Canada and Mexico, on whom Trump had placed 25% tariffs over the weekend. Mexican President Sheinbaum announced early Monday that the tariffs placed on Mexico had been put on hold for 30 days after she reached an agreement with Trump, which he later confirmed. She promised to send 10,000 national guard troops to its border with the United States to help seal it against the illegal movement of migrants and drugs, while agreeing to continue to discuss other measures to seal the border. A similar 30-day pause with Canada was announced Monday afternoon after a second conversation between Canadian Prime Minister Trudeau and Trump, in which Trudeau promised to implement a $1.3 billion border security plan, while also appointing a fentanyl czar to deal with the drug issue. Canada will utilize new helicopters, technology, personnel and enhanced coordination with American authorities to help seal the border.

 

The grain and oilseed markets surged higher Monday when reports of the pause in tariffs on Mexico hit the wires, with additional optimism coming when it looked likely that we would see a pause in tariffs on Canada as well. Both Canada and Mexico are major trading partners with the United States in the commodity space. Yet, the commodities took a hit early this morning when China implemented its tariffs. Crude oil was hit directly, as was LNG and coal. But the grain and oilseed were not hit by the Chinese tariffs today. Yet, the market fears that they will be. However, the markets need to understand that tariffs are not our problem in exporting grain and oilseeds to China. Our problem is the strong dollar versus the weak real and peso in Brazil and Argentina. South American-produced corn and soybeans will be cheaper – and substantially cheaper – than U.S. commodities when those supplies are available. China comes to the United States to buy when the bins are empty in South America. One exception is that Brazilian soybeans don’t store as well, so China buys U.S. soybeans for its reserve supplies when it cannot find affordable supplies in Argentina. As such, we will continue to lose market share to Brazil as long as the currency exchange rates continue to encourage expansion of production there, unless China signs a trade agreement that forces it to buy substantial quantities of U.S. corn and/or soybeans at a loss to get more favorable treatment on the much larger consumer goods export share that it ships to the United States. IF we were to see such an agreement – and that’s still a big IF – it would likely only last the duration of the Trump presidency.      

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