Trade War is Not Over Until it is Fixed with China !!!

In cricket, we say that match is not over until the last ball is bowled. In same way, one cannot say that concern around trade war is over by giving a reprieve of 90 days.

It is very difficult for anyone to figure out how supply chain and inter-connectedness on trade front will pan out, sans China; given the fact that it is world’s largest merchandise exporter for most of products.

Moreover, no one knows how China is going to play out, after it increased the tariff on US to 84% and in turn US pushed to 124% on China.

Will it come for negotiation with US, or play a game of attrition because it knows that Trump has to answer its citizens and not the other way round. Further, so far, Chinese financial market, mainly FX or bonds has not reacted as violently as seen in US.

There are talks around that Trump pivoted yesterday as US bond yields spiked violently during Asian markets to 4.50+, triggering different rumours, ranging from basis risk blowing up, to some Asian central bank selling bonds to build defence for their currency.

Remember, one of the main objectives of tariff, was also to bring the bond yields lower so that US can roll-over its debt at lower yield, besides using the tariff to fix trade balance and possibly negotiate with countries to switch to longer duration bonds. But unfortunately, market has another way to look at things.

Equity was expected to react negatively and hence most of experts within Trump administration talked about, it is time for main street and not wall street, but possibly got it wrong on bond yields when instead of moving lower, it turned the other way, forcing Trump to PIVOT.

How bonds can be so powerful, one need to read the comments made by James Caville, Clinton political advisor - I used to think that if there is reincarnation, i wanted to be come back as president or the pope. But now, i would like to come back as the bond market. You can intimidate anyone.

Coming back to topic, given the insane level of tariff between world’s largest importer and exporter, it cannot be said as tariff or trade war any longer, but trade embargo, and there is famous saying by French economist - where trade does not flow, army does.

Not implying that anything remotely to it can happen on ground, but damage to global trading system/order and in turn to economies, will be no less.

It is way too difficult for anyone to figure out how in this inter-connected world, who is swimming naked. We saw a glimpse of it post COVID, when global supply chain got broken putting many countries in grade situation, or Germany faced its worst economic crisis with sudden stoppage to Russian natural gas. Trade inter-connectedness with China is no different, in my view.

Good part is there is some chatter of US and Chinese leaders ready to discuss on tariff. Hope it gets momentum but until then it is time to be extremely agile with sharp focus on risk management. Tactical bounce back along with fast changing situation can be a big sucker. However, amidst all the chaos, noise and trust deficit, precious metals look to stand tall.