As the clock hit 12.01am on Friday, US tariffs on $34 billion worth of imports from China came into effect, and it did not take long for China to retaliate by imposing tariffs on a number of US goods, including a 25% import tariff on US soybeans. We believe the tariff impact is fully priced in already, and therefore do not expect further pressure on CBOT soybeans
Unsurprisingly, CBOT soybeans came under significant pressure following the initial announcement from China back in April that it would retaliate to any US tariffs. CBOT soybean prices have fallen by a little over 21% since mid-April, trading below $8.50/bu, levels last seen back in 2008. In fact, CBOT has traded down to levels where, even if we take into consideration the 25% import tariff, US soybeans are still workable into the Chinese market. At the moment, we estimate that import parity is around $8.70/bu, compared to the CBOT November 2018 contract trading at around $8.56/bu.
Meanwhile, the Chinese domestic soybean futures market has strangely also traded lower, falling by around 7% since mid-April. If we look at the move in the domestic market in USD terms, prices have fallen by almost 12%, reflecting the depreciation that we have seen in the CNY recently. It appears that the domestic market started pricing in these tariffs earlier in the year, with domestic futures rallying strongly over 1Q18.
The world is about to enter into a real trade war. In our view, only significant protests among Trump voters or a quick surrender of US trade partners can prevent this. There are few signs this will happen anytime soon
Things have changed. In our analysis at the end of March, there was a real possibility that various trade partners would be permanently exempted from higher US tariffs and that others would give in to Trump's demands under the threat of elevated tariffs, thereby avoiding a broad trade war. At first, this seemed to be the case. South Korea, Brazil, Argentina and especially China made considerable concessions.
But in the run-up to the G7 summit, Trump decided that his allies in Europe and his Nafta partners Mexico and Canada would no longer be exempt from steel and aluminium tariffs. He also decided that the concessions offered by the Chinese were not enough to put the trade conflict between the US and China on hold. Trump ruled that a 25% tariff on $50 billion worth of imports from China- as a punishment for alleged theft of US intellectual property- would be implemented on 6 July. As a consequence, China, the EU, Canada and Mexico are hitting back.
And we fear there is more to come. China has threatened to impose its own tariffs on US products on Friday, which the US has warned will lead to tariffs on an additional $200 billion of Chinese export goods at a rate of 10%. Trump has already warned that if the Chinese retaliate again, another package of goods worth $200 billion will be subject to higher tariffs as well.
In addition, the EU could see its car exports to the US hampered due to an import tax of 20% if the US Commerce Department's investigation concludes that imports of cars are a threat to national security. This measure could well be applied to other countries given that the current investigation encompasses imported cars from all countries (not just the EU). According to the Financial Times, the EU is considering a special deal with the US on cars, but many hurdles need to be overcome for this to become reality.
The near-term outlook for Asian currencies is unambiguously negative – further out, the scope for some recovery remains
It seems as if we've been talking about trade wars for months now yet until this week, no tariffs had actually been levied, and some still hold out hope that a trade war can be averted.
We think it's getting too late for that. We sense that the Trump administration feels the global trade environment is unfair, that tariffs can help redress the balance in the US’ favour and that it can win a trade war. We disagree with both the premise and the solution - but that doesn’t change anything. Tariffs are coming, and some have already arrived.
With tariffs we expect global trade growth to worsen. This is going to be important in terms of local Asian currency (FX) strength, but exactly how much and for how long is a more complicated story.
Let’s start by considering the relationship between global trade and Asian currency strength. The figure below shows world trade in USD plotted against both the ADXY index (index of nominal Asia ex-Japan currencies) and the headline CRB commodity index.
Everything you need to know about central bank policy around the world
The Federal Reserve is sticking to its 'gradual' policy normalisation plan, which essentially means a rate hike every quarter. However in the near term, the balance of risks is skewed towards swifter action despite financial market pre-occupation over the potential for a tariff-led trade war.
The economy looks set to grow 4% annualised in 2Q18, buoyed by tax cuts, after a 'soft' 2% in 1Q18 while inflation continues to edge higher with headline CPI set to hit 3% YoY in the next couple of months. At the same time, employment growth is averaging 207,000 per month YTD in 2018 versus the 182,000 monthly average in 2017 and you have to go all the way back to December 1969 to find a lower unemployment rate.
For now, corporate America is sanguine on the trade situation. Business surveys are strong given robust demand, but should tensions escalate and trade barriers go up, growth may moderate. This could lead to a slower pace of interest rate hikes in 2019, but the process is unlikely to stop. The tightness in the labour market and rising pay pressures will continue to support both consumer demand and inflation.
Uncertainty over a potential tit-for-tat trade war dominated markets this week, with the US slapping tariffs on China and China reciprocating in kind. The trade tiff has raised questions about the outlook for global growth, central bank policy and the direction of financial markets. Here's everything we've been thinking about