Trade war risks inject volatility to markets
There were large swings in cyclical asset prices yesterday as investors track developments in a potential trade war. Investors appeared assuaged that the US and China can avoid an impasse. Should a trade war escalate Nitesh Shah, Director Research bei ETF Securities, believes that defensive assets are likely to gain traction at the cost of cyclicals.06.04.2018 | 12:05 Uhr
Affected commodities made sharp intra-day moves. From peak to trough, soybeans fell 5.5% and corn fell 4.5%. However, there were hopes that these tariffs could be avoided when the White House’s National Economic Council Director Larry Kudlow spent much of the day trying to calm markets and said they still have time work out their differences. Soybeans closed 1.95% down, while corn declined 1.93%. Hopes of a resolution led to the S&P 500 gaining 1.34% yesterday. Soy and corn are trading up at the time of writing.
We believe if this trade war escalates further, cyclical commodities including base metals could get hurt as prospects for global growth are scaled back. Global purchasing manager indices already appear to be losing steam in recent months after reaching a seven year high and the trade war could shake confidence.
In this environment of uncertainty, defensive assets like gold could benefit, playing off its long-established safe haven traits.
Of course the world’s two largest economic powers could realise at some point that nobody wins from a trade war and may seek to de-escalate the standoff. We saw signs of that late yesterday. In which case, base metals are likely to do well, given that most of them are in a supply deficit and given the dearth of capital investment in recent years, mine supply is likely to remain constrained.