Displaying items by tag: trade war

(San Francisco)

We ran a piece yesterday highlighting the risk of China using rare earth elements as a bargaining chip in the trade war. The US currently gets 80% of its rare earths from China, and the elements are used in everything from smartphones, glass, electric vehicles, and jet engines. The biggest loser if China blocks access could be Apple. The company is currently planning a ramp up in production for its new fall products, so according to Goldman Sachs “even a short term action affecting production could have longer term consequences for the company.”

FINSUM: It is hard to calculate the financial impact at this point, but we expect it could be significant given that these elements are key to smartphone production.

(Washington)

The next phase of the US-China trade war is coming, and it looks like it may be even worse. At the beginning both sides focused on levying higher tariffs on more goods, then Trump took the step of limiting China’s access to semiconductors with his ban on Huawei. Now the next phase may be much more specific and potentially damaging for the US—China is likely to limit the US’ access to rare earths used to make all kinds of technology devices. Access to such rare earth elements is one of the biggest US weaknesses in tech and Beijing has the power to block access because the US imports 80% of its rare earths from China.

FINSUM: It is hard to tell how bad this could be. On the one hand, the total US imports of Chinese rare earths are only $160m, but on the other, if there is not another easy source then it could hamstring the businesses that use them.

(New York)

The market has been worried that the trade war may prove inflationary. Higher tariffs would mean higher prices passed along to customers, in turn raising inflation. This is scary because it means the US could get caught in a stagnant economy with higher inflation, which would keep the Fed from cutting. However, the reality is that the trade war may in fact be deflationary instead. The reason why is two-part. Firstly, governments, businesses, and consumers are likely to take actions to off-set the rise in costs; and secondly, the economic toll may hurt the economy so that prices cannot rise.

FINSUM: We do not think tariffs will be inflationary. Thinking of them as automatically inflationary is very narrow-minded, as it does not actually take into account the effects tariffs will have on aggregate demand.

(New York)

Ten-year yields are low, very low, compared to where they were just a few months ago. Recently poor news on the trade front has sent yields spiraling lower, all the way down to 2.30%. The speed of the rally in Treasuries also prompts the interesting question of whether China weaponizing its Treasury holdings even matters. Yields have fallen so steeply, and there is so much momentum supporting the bonds, that even if China were to dump its holdings, it is hard to imagine that yields could jump back to even where they were a few months ago.

FINSUM: Let’s say hypothetically that China dumps its Treasuries. How far would ten-year yields rise? Maybe to 2.8%? We wouldn’t even be back to where we were in the fourth quarter, and it is hard to imagine that move having much of an impact on the economy itself.

(New York)

For most of this year and last, the idea of a nasty full-blown trade war was like a boogey man that stalked investors, but still seemed a slightly distant threat. That is no longer the case, as an ugly trade war has rapidly developed into the status quo. Accordingly, many top analysts, such as at JP Morgan and Nomura, are saying that high US tariffs on China are here to stay. Market volatility is likely to continue as new news continues to stream out.

FINSUM: There is a lot to worry about in this trade war, but one of our immediate, but less discussed, concerns is about the intersection of tariffs, the Fed, and inflation. The tariffs are likely to raise US inflation by boosting prices for goods, which could keep the Fed from hiking, trapping us in a difficult environment.