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Trade War Truce Sends Markets Soaring

China US

Monday, December 3, 2018

Trade war truce. The U.S. and China declared a truce in the trade war, sending global markets shooting up. Commodity prices rose, as one of the key near-term downside risks to demand has been delayed, if not entirely removed. Meanwhile, last week the U.S. Federal Reserve signaled a softer stance on interest rate increases. Taken together, global financial markets have received a dramatic boost. 

Chart Of The Week

(Click to enlarge)

- Soybean prices have been hit hard this year, weighed down by Chinese tariffs on U.S. soybeans. After hitting a peak of over $10.50 per bushel in February, prices sank in the spring and summer months as tariffs took hold and the trade war escalated.

- Prices bottomed out near $8/bushel in September after U.S. tariffs on $200 billion of Chinese imports took effect, and China responded.

- The truce in Buenos Aires this past weekend pushed prices up by 2 percent in early trading on Monday, with prices rising to their highest level in months.

Markets

Trade war truce. In Argentina, Donald Trump and Xi Jingping decided to delay the trade war in order to provide more time for negotiations. The U.S. will suspend the scheduled increase in tariffs on $200 billion of Chinese imports, previously set to jump from 10 to 25 percent on January 1. China pledged to buy more American products in return. The New York Times said the deal “was less a breakthrough than a breakdown averted.” The two sides set a 90-day deadline for a broader agreement. The serious rift between the two countries over trade specifics has not gone away, and could once again lead to tensions as the next deadline nears, but for now the truce has been well received by the markets. Related: How Central Banks Impact Gold Markets

U.S. to withdraw from NAFTA. President Trump announced his decision to withdraw the U.S. from NAFTA, a move that could increase the pressure on the Congress to ratify the revised U.S-Mexico-Canada agreement (USMCA), or NAFTA 2.0. Ratification has been an open question, particularly with the U.S. House of Representatives soon to be under the control of the Democrats. The exit from NAFTA will put tremendous pressure on the House to replace it with the USMCA. If the USMCA falters, both treaties would be void.

Could Fed rate tightening be nearing an end? Last Wednesday, global stocks spiked on hopes that the U.S. Federal Reserve would slow the pace of rate tightening. Fed chairman Jerome Powell said the central bank’s benchmark interest rate was “just below” the neutral level, which suggested that the Fed could be close to where it wants interest rates, implying that few, if any, future rate hikes might be in store. Those words stand in sharp contrast to last month, when Powell said the benchmark rate was “a long way” from neutral.  

Commodities

Steel tariffs invigorate domestic industry. Trump’s steel tariffs may be a drag on other sectors, but the U.S. steel industry has been revived. British metals magnate Sanjeev Gupta has plans to build up a U.S.-based steel company and then take it public. Gupta’s GFG Alliance will buy Illinois-based Keystone Consolidated Industries Inc. for $320 million. Instead of shipping scrap metal abroad to be processed into steel and shipped back, as the U.S. typically does, GFG wants to keep the process within the U.S.

Soybean prices jump on U.S-China truce. Soybean prices for January delivery rose by nearly 2 percent on the Chicago Mercantile Exchange after Trump and Xi hit the pause button on the trade war. As part of the agreement, “China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural product from our farmers immediately,” the White House said in a statement.

Gold climbs on weaker dollar. The trade war truce has increased the risk appetite for investors, according to Commerzbank, and has also led to a weaker dollar. As a result, gold saw a lift on Monday, rising to $1,230 per troy ounce. The next catalyst for gold and currencies could come from Fed chairman Jerome Powell, who will give another speech this week, which could offer clues into the central bank’s plans.              

Energy    

Qatar to leave OPEC. Qatar said that it plans on withdrawing from OPEC in order to focus its efforts on natural gas production. The decision also comes just days before the OPEC meeting in Vienna, where the group is working on a collective production cut. Qatar was also the target of a Saudi-led economic blockade in 2017.  

Oil prices jump on apparent OPEC+ agreement. Oil prices rose after Russia agreed to go along with production cuts at the OPEC+ meeting. On Saturday, at the G20 summit in Argentina, Russian President Vladimir Putin said that he had reached an agreement with Saudi Arabia on output restraints, although he refrained from offering specifics. Brent crude was up 4 percent in early trading on Monday.

Related: Bitmain Faces $5 Million Lawsuit

Alberta orders oil production cut. Alberta ordered mandatory oil production cuts as prices for Western Canada Select wallow at crisis levels. The province ordered the industry to cut production by 8.7 percent, or 325,000 bpd, beginning in January. The order will remain in effect until excess storage is whittled away. The decision comes as midstream capacity is tapped out, and production has exceeded the ability of the region to move product to market.

Cryptocurrencies

Oil deals using blockchain. Oil majors and trading firms can now ink deals using a live blockchain-based platform, a milestone for the technology. Blockchain has been held up as a potential revolutionary breakthrough for commodities trading, promising lower costs and greater transparency. London-based Vakt is the first to go live, a platform created by a consortium of companies including BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS.A) and Equinor (NYSE: EQNR). These companies can already use Vakt to sign deals and the platform will be opened up to a broader market next year.

G20 agrees on crypto plan. The G20 summit concluded with an agreement on the need to create an international framework to tax cryptocurrency transactions. G20 leaders agreed that tax evasion and loopholes should be closed, and as it currently stands, national tax authorities are having trouble collecting tax on cryptocurrency transactions. “We will continue to work together to seek a consensus-based solution to address the impacts of the digitalization of the economy on the international tax system with an update in 2019 and a final report by 2020,” the G20 leader's declaration says.

Ohio accelerators invest $100 million into blockchain. JumpStart, an Ohio-based business accelerator, plans on investing $100 million into early stage blockchain firms. Ohio is one of the most favorable states for blockchain technology startups. Just last week, the state announced that it would begin accepting tax payments in the form of Bitcoin.

By Josh Owens for Safehaven.com

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