Commodity futures are in the crosshairs as the U.S. and China talk tough on tariffs, sparking what could be an extended period of market volatility.
Talk of a trade war is now roiling commodity markets, especially metals and agriculture, but the activity is not necessarily something to be feared for the well-informed investor.
First the background. China late last week threatened to slap tariffs on $3 billion worth of American products, including fruit, pork, wine, seamless steel pipes, along with more than 100 other products. It was in response to the Trump administration’s plan to impose $60 billion worth of tariffs on Chinese-made products.
The news sent global markets reeling as investors recoiled at the idea of the two great trading nations engaging in a tit-for-tat war over trade. On Friday, March 23, farm commodities tumbled. The markets reversed on Monday, March 27, with prices turning higher, but analysts predict further volatility in the weeks ahead.
To be clear, the threats on tariffs are still in the talking stage. The Trump White House could be using the tariff announcement as an opening salvo in more-extended negotiations with China. Positions could change, especially if pressure is brought to bear from influential groups in the U.S., including from the farm lobby.
Beijing vowed to challenge the tariffs at the World Trade Organization, and most observers expect China will go after America’s large soybean shipments, if pressed.
China is the biggest buyer of U.S. soybeans — which are traded on the Chicago Board of Trade — taking nearly a third of U.S. production worth $14 billion a year.
“Multiple reports indicate the Chinese have U.S. soybeans squarely in their sights for retaliation, and this decision places soybean farmers across the country in financial danger,” American Soybean Association President John Heisdorffer said in a statement last week.
May soybeans futures dropped as much as 2 percent a bushel on the Chicago Board of Trade on Friday before staging a partial recovery, according to Bloomberg data.
Trade War Woes
Analysts say, for now, China is moving cautiously, but the country made it clear in a statement it would not shrink from escalating the rift if provoked.
“We do seem to be entering a trade war,” Eswar Prasad, a senior professor of trade policy at Cornell University told the New York Times. “The U.S. has unsheathed its sword after an extended period of saber rattling, and the Chinese are now unsheathing their weapons.”
And on Friday, UBS warned that metals and energy prices could come under pressure if it all escalates to a global trade war.
“Obviously, going into a deep trade war, industrial commodities are going to be negatively affected,” Dominic Schnider, head of commodities at UBS, told Bloomberg Television on Wednesday. “It’s still good for gold.”
So, it’s essential for futures investors to stay informed about the impact that this war of words will have on markets. And it’s also crucial to note that when the commodities trade is in flux, opportunities can be found in the volatility.
The key to all this is to know your financial position and your appetite for risk. Risk always exists, which makes excellent investment advice of utmost importance.
Daniel’s Trading stands ready to help you get the best advice possible. Daniels Trading brings a wealth of experience to the tables, and investors can take advantage of a broad array of expertise that will help you make smart decisions. Contact us to learn more about opening a futures trading account with Daniel’s Trading.