The real reason Trump wanted a bigger rate cut

Friday, 2 August 2019
Adelaide, Australia
By Bernd Struben

Boom!

That’s the sound of Donald Trump’s new round of 10% tariffs set to hit US$300 billion of Chinese exports on 1 September.

The trade war is on. Best get used to it and invest accordingly.

Trump lobbed the latest volley in a series of tweets overnight Aussie time.

While he referred to Xi Jinping as ‘my friend President Xi’, Trump was disappointed by China’s decision to renegotiate a previously accepted draft agreement. And he singled out China’s failure to — as yet — ramp up its purchases of US agricultural products. As well as Xi’s failure to stamp out the Fentanyl trade, responsible for soaring numbers of US overdoses.

The US has already slapped 25% tariffs on US$250 billion of Chinese imports. China has responded with similar tariffs on US$110 billion of US imports. But with the US importing far more goods from China, the Chinese can’t match Trump in the tariff game.

The latest action, which Trump tellingly labels ‘a small additional Tariff of 10%’ will impact the remaining US$300 billion of Chinese imports. As mentioned up top, they will take effect on 1 September. That will come as trade talks continue.

The new tariffs will also encompass a far wider range of consumer goods, with the tech industry bracing for impact. And Trump could still increase the levy from here, saying tariffs could go ‘well beyond’ 25%.

Apple Inc. [NASDAQ:AAPL] is one to watch closely. Most of Apple’s iPhone’s are put together in China. Not surprisingly then, Apple’s share price fell 4.2% on the news, to close the day down 2.2%.

But it wasn’t just Apple. Here’s the one day chart for the Dow Jones:



chart image
Source: Google Finance
Click to enlarge

The Dow fell 2.0% following on Trump’s tweets, to close down 1.1%.

Precisely which companies will be hit and which will get a reprieve should become clear over the coming days.

From Bloomberg:

The Office of U.S. Trade Representative had released a list in May of more than 3,800 import codes for products that would be subject to the tariff, and a finalized list will be published in the Federal Register in the coming days, according to USTR.

Regular readers will know I’d expected Trump and Xi to steer their negotiating teams to a mutually acceptable trade deal by now. But any near term deal is looking increasingly unlikely.

Trump recently said he believes China will hold off with any meaningful concessions until after the November 2020 US presidential election. If the Democrats take the White House, Xi might be able to strike a less onerous trade deal.

Though Trump, as you’d expect, is convinced voters will sweep him back into office. After that, he says, the Chinese will rush to sign a ‘great new deal’…or else.

Either way, yesterday’s new round of tariffs help explain why Trump was pushing Fed Chair Jay Powell so hard for a bigger interest rate cut.

Some pundits are theorising Trump would have held off on additional tariffs if he’d gotten his bigger rate cut on Wednesday. And that, in fact, the new tariffs are meant to force Powell’s hand into delivering additional cuts.

I think they have it backwards. I reckon Trump had the latest round of tariffs locked and loaded. There was no way he was going to sit back another month without firing that salvo.

That’s why Trump tweeted, ‘We are winning anyway, but I am certainly not getting much help from the Federal Reserve!

 Indeed, if Powell had cut rates further, US markets wouldn’t have tanked so badly.

With that said, let’s have a look at those markets now.

Markets

Overnight, the Dow Jones Industrial Average closed down 280.85 points, or 1.05%.

The S&P 500 closed down 26.82 points, or 0.90%.

In Europe the Euro Stoxx 50 index finished up 23.18 points, or 0.67%. Meanwhile, the FTSE 100 fell 0.03%, and Germany’s DAX closed up 64.11 points, or 0.53%.

In Asian markets Japan’s Nikkei 225 is down 562.01 points, or 2.61%. China’s CSI 300 is down 1.75%.

In Australia, the S&P/ASX 200 is down 22.12 points, or 0.33%.

West Texas Intermediate crude oil is US$54.54 per barrel. Brent crude is US$61.23 per barrel.

That puts WTI down 5.2% since this time yesterday. Overnight losses were even higher, seeing WTI fall 7.9%, the largest drop since February 2015.

The reason?

Trump’s new round of tariffs, of course. Effectively adding US$30 billion to the price of Chinese exports, global trade and the demand for fuel to move all those goods around are expected to take another hit.

Now if you followed my unofficial advice from Tuesday’s Port Phillip Insider and decided to go long on crude, you’re obviously sitting on an early loss. If you went with a 2X leveraged crude oil ETF, that loss may run over 14% already. Which is why I always urge caution with leverage. While it can turbocharge any gains it can equally magnify any losses.

But I’m sticking to my guns on that call. Which was, ‘If hostilities ramp up and the Strait of Hormuz closes for business, oil could spike above US$100 per barrel in short order.’

While I hope the situation can still be resolved peacefully, every day sees a bigger military build-up in the region. And it’s not just the US and UK facing off with Iran.

If things turn pear shaped the US will likely be joined by a coalition of partners its asking to help safeguard tankers in the Strait of Hormuz. That probably will include Australia as well.

From the AFR:

Scott Morrison is considering joining a US-led international coalition to protect shipping in the Persian Gulf from Iranian forces following a request from the Trump administration.

As more warships and planes pile into the Gulf, it won’t take much to set this powder keg alight. While we can pray for peace, we can also position ourselves to benefit if crude oil prices go through the roof.

Turning to gold, the yellow metal soared overnight and is trading for US$1,440.91 (AU$2,117.43) per troy ounce. Silver is US$16.33 (AU$24.00) per troy ounce. (More on gold below…)

One bitcoin is worth US$10,384.02.

The Aussie dollar is worth 68.05 US cents.

Another new Aussie dollar gold record

Oil may not have liked the news of Trump’s fresh tariffs on Chinese imports.

But gold sure did.

Gold’s haven status is on clear display. The yellow metal rocketed up more than US$30 per ounce on fears of a prolonged trade war and disruptions to the global economy.

In Aussie dollars gold surged 2.6% since I wrote to you yesterday. At AU$2,117.43 per ounce, that’s yet another new record.

Little surprise then that the local gold miners are loving it.

While the broader ASX 200 is down 0.33% at time of writing, most of the top mining stocks are well into the black.

Newcrest Mining Limited [ASX:NCM], with a market cap of $27.8 billion, is up 7.41% today. Year-to-date Newcrest’s share price is up 32.59%.

On the smaller end of the scale, Resolute Mining Limited [ASX:RSG], with a market cap of $1.4 billion, is up 10.12% in intraday trading.

As you can see, investors in Newcrest and Resolute are enjoying gains far greater than the 2.6% rise in the Aussie dollar gold price. That’s as you’d expect. As we’ve covered here before, gold stocks are highly leveraged to the price of gold. Meaning a small rise in the gold price tends to see far larger share price gains among gold stocks.

Not that every gold miner rises alongside the price of bullion. Investing in any old gold stocks, especially in the small end of the sector, is as good a way as any to lose money.

That’s where a little advice from Greg Canavan can come in handy.

Greg’s spent many long hours researching Australia’s gold market. And he’s come up with what he believes are the four best positioned Aussie gold juniors to benefit from gold’s bull run. A run he expects to see gold blast through US$2,000 per ounce for reasons the mainstream financial media has yet to pay heed to.

If you haven’t already, I suggest you take some time over the weekend to read Greg’s report on ‘peak gold’.

You can access that here.

Cheers,
Bernd