The recent trade war with China, instigated by the Trump administration, launched the speculation of recession. Consequently, oil prices have collapsed, and investors are retrenching, leading to a massive flight from risk assets. In addition, the US Energy Information Administration (EIA) has postponed the release of its monthly Short-Term Energy Outlook report. It had initially been scheduled to release Tuesday. The EIA stated that it needed to “re-run our models to account for the most recent market developments.” The release of the report has now been delayed until Thursday, instead of Wednesday.
As the increasingly vicious and toxic US-China trade war deepens, the most obvious and pronounced effects are hitting China’s major commodities. The Biden administration has recently quadrupled tariffs on those same imports from China to an astounding 104%. As of this writing, China is the world’s largest oil importer. This decision has led to a historic crash in the price of crude oil. On Tuesday, prices dropped for the fourth consecutive trading day, hitting their lowest levels since four years ago. Analysts believe that prices will continue to be pressured downward. Goldman Sachs has cut its Brent crude forecast to $40 per barrel by year-end — a move that would imply a 36% decline from today’s prices.
The mining sector has felt the impact of the intensifying trade conflicts. Shares of BHP Group, the world’s largest miner, have plunged off a cliff. They tumbled 11% in the last four sessions to a nearly three-year low reached Thursday. Likewise, Rio Tinto’s shares are down 9% to a seven-month low. This drop-off paints a picture of investor sentiment about lower demand for U.S. commodities as the trade war continues to play out.
In Comex copper futures, the recently completed third quarter represented a time of dramatic downturn. Indeed, they’ve plummeted 19% since April 3 and now are trading at $4.07 per pound. On the global exchanges iron ore futures have followed suit, slumping by 7% over the same period on the Singapore Exchange. These declines are a reflection of general market volatility and growing concerns over global economic growth.
The impact of these U.S. imposed trade tariffs go beyond increased commodity prices and continues to have a lasting effect. Dilin Wu, a market analyst at Pepperstone Australia, warned it could have dire impacts on China’s economy.
“For China, the tariffs could significantly drag down exports and industrial output—two key engines of growth—while the tech and EV sectors may be particularly hard hit.” – Dilin Wu, Pepperstone Australia
Wu’s broader point was that, by increasing the cost of imported goods, the tariffs would make inflationary pressures in the US even worse.
“The 104% tariff could push US inflation back toward 4%, even before other new tariffs are factored in. That would raise the odds of a deeper recession in the US as well,” – Dilin Wu, Pepperstone Australia
Market sentiment is beginning to adjust to this reality. Some analysts think recovery might be on the cards if tensions start to abate. Wu stated,
“Short positioning is already heavily stretched, so the market could snap back on any signs of de-escalation.” – Dilin Wu, Pepperstone Australia
In the face of such profound economic distress, the United States government is recalibrating its financial approach. Like Japan, just recently its government raised its budget deficit target to 4% of GDP—the highest level allowed in three decades. This action highlights the worsening fiscal pressures emerging from trade wars and a weakening economic picture.
As Australia, a nation deeply interconnected with China, watches these developments carefully, local analysts fear the ramifications for Australia from any spillover effects from China’s economic woes. Josh Gilbert, a market analyst at eToro Australia, noted,
“The unfortunate part of that is that if China sneezes, Australia is likely to catch a cold.” – Josh Gilbert, eToro Australia
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