Morning Note: Market news and our thoughts on the US tariffs
Market News
Commodity markets continued to rally, supported by expectations for eventual Federal Reserve interest rate cuts. Gold pushed on a new high before slipping back to $2,440 an ounce. Silver prices rose above $32 per ounce, the highest level since December 2012, pushing year-to-date gains to nearly 33%. The oil price was firm at $84.10 a barrel, while Copper hit a new high on the back of supply concerns. Meanwhile, BHP is debating an improved Anglo American bid as the deadline nears.
Equity markets have also kicked off the week on a positive note. The MSCI AC Asia Pacific Index advanced for a seventh day, with the materials sector posting the biggest percentage increase: Nikkei 225 (+0.7%); Hang Seng (+0.6%); Shanghai Composite (+0.6%). The S&P 500 Futures currently predict the US market to open slightly higher this afternoon. The FTSE 100 is trading 0.3% higher at 8,441.
US officials warned tech and telecom firms that undersea cables may be vulnerable to tampering by Chinese repair ships, the WSJ reported. Biden’s new tariffs have been placed on $18bn of annual imports from China target batteries, chips, solar cells, and critical minerals. That’s in addition to previous increases on steel, aluminum, and electric vehicles.
With the US earning season drawing to a close, a broad swath of companies says the worst of last year’s profit pain is over. Per-share earnings climbed 7.3% in the first three months of 2024 — on track for the second-best growth in two years. The big one still to report is Nvidia, which it expected to disclose a more than three-fold jump in quarterly revenue at its earnings on Thursday.
Japanese bonds sold off – the 10-year yield rose to 0.98%, the highest level since 2013 – on the prospect the central bank would raise rates to combat increased inflation and the weak yen. UK house prices rose by 0.8% in May to a record average £375,131, Rightmove said. Sterling currently trades at $1.2699 and €1.1672.
Source: Bloomberg
Macro View - Tariffs
Last week US President Joe Biden took to Twitter (I still can’t get around to calling it X) to unveil a sweeping array of China tariffs that target key strategic sectors.
Source: X
This comes hot on the heels of the news (as reported by the Financial Times) that the Biden administration has revoked export licenses that allow Intel and Qualcomm to supply Huawei with semiconductors as Washington increases the pressure on the Chinese telecoms equipment company. The move by the US Department of Commerce affects the supply of chips for Huawei’s laptop computers and mobile phones, according to people familiar with the situation.
https://www.ft.com/content/cf965960-b083-49ee-bae1-6ce95fe872a3
This is important. These moves are a direct assault on the global trading system that has grown over the last couple of decades, where China exports to the world and runs massive surpluses and the US absorbs these surpluses by running the corresponding deficits. While this set-up worked well for both parties for a while, it is increasingly clear that for the US, the strategic weaknesses that have resulted are now overwhelming any financial benefits.
Observations
- This policy direction is bipartisan.
The recent tariffs from the Biden administration are a something of a pivot from his previous position.
Source: X
It appears that both sides are now firmly in this camp. Trump responded to the Biden tariffs by saying he would impose 200% tariffs.
- This policy is inflationary.
If decades of liberalised global trade acted as a deflationary impulse around the globe, a big shift in the opposite direction should have the opposite effect. The Covid crisis gave us an insight into what disruption to global supply chains means for prices. Tariffs on this scale are simply a man-made disruption to supply chains.
Imposing tariffs on China to revitalize US industries may be the best policy from a strategic and national security perspective, however it is unlikely to be good from a financial perspective for holders of long dated US Treasuries.
- This policy is in time, revolutionary.
There is no need for a resource-endowed, advanced, developed nation such as the US to be running persistent trade deficits. This dynamic links back to the US dollar’s role as the global reserve currency. The removal of a US deficit means the removal of the flow of dollars that lubricates the Eurodollar system where tens of trillions of offshore dollar debt circulate. Re-modelling the current account via tariffs necessitates a re-modelling of the capital account via changes in financial flows, leading to potentially explosive moves in currencies and asset classes.
Inflation and revolution are normally very low on the list of priorities for any member of the political class. However, the existing global system, with the US at its centre, is clearly hurting the US strategic interests and both sides of the political spectrum know it. Exiting or at the very least, re-wiring this system, is going to cause mayhem. But it’s the only way.