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A Trade Deal Is In the Works – Just Not With China

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A Trade Deal Is In the Works – Just Not With China

Stock markets in the U.S. soared Monday on news of a trade deal. Granted, it is between the United States and Mexico and has little impact on the price of copper. In fact, London copper prices lost ground on Tuesday and are set to fall for three out of the last four sessions as the trade war between the U.S. and China continues to cloud the outlook for the red metal.

U.S. and Chinese officials ended two days of talks last week with no major breakthrough as their trade war escalated with yet another round of dueling tariffs. The U.S. imposed another $16 billion in tariffs on Chinese goods, and China retaliated with a proportionate response of $16 billion on U.S. goods. The total number of tariffs now stands at about $50 billion on both sides.

Trade issues between the U.S. and China have obviously impacted markets, but most of the effect has been on commodities prices. Frequent tED contributor Andrew Hecht of Seeking Alpha points out that China has been devaluing their currency to make their goods more competitive around the world, and the U.S. dollar has been appreciating. “The potential for both a trade and currency war could cause recessionary pressure on the global economy,” states Hecht. “It seems that the impact on China is worse than on the U.S. at this point. While all equity indices are at or close to all-time highs in the U.S., the Chinese stock market has not fared as well.”

As a result, reports out of Beijing say the Chinese government is urging more infrastructure spending as their economy faces both domestic and external risks, i.e. U.S. tariffs. But the benefits will take time to kick in, with analysts expecting the economy to get worse before it gets better.

“As long as trade tensions drag on, the market will remain concerned about its impact on global demand,” Argonaut Securities analyst Helen Lau told Reuters. “There is no news-flow on any supply shocks, such as strikes, which could support prices.”

Copper opened this morning near $2.70 a pound. Click the image below for live pricing.

Copper prices could remain vulnerable to swings in the dollar this week as the red metal’s inverse relationship to dollar continues to offset safe haven demand.

The dollar index, which measures the greenback’s performance against six other currencies, was nearly flat in early reports Tuesday following two previous sessions of losses. The dollar has fallen more than 2 percent since hitting a high not seen in over a year on August 15, amid President Trump’s criticism of the Federal Reserve for raising interest rates at a time when the US government was trying to stimulate the economy.

Copper prices did see a slight surge toward the end of last week thanks to a weaker U.S. dollar following a speech by Fed Chairman Jerome Powell at the central bank’s annual gathering at Jackson Hole, Wyo. Powell said he expects to see further interest rate increases, but suggested that the Fed funds rate was getting closer to neutral.

Once interest rates reach a neutral equilibrium, where they neither stimulate nor suppress the economy the Fed will most likely stop hiking rates.

A weaker U.S. currency makes copper and other dollar-denominated commodities less expensive for foreign investors.

Looking Ahead

It looks like another fairly light week on the economic calendar.

Today’s U.S. trade data will be in focus after the above mentioned U.S.-China trade talks ended last week with little progress and more tariffs.

On Wednesday investors will get the chance to analyze a revision to second quarter U.S. GDP. Growth is expected to be revised down to 4% from the initial estimate of 4.1%, but that would still represent the fastest pace of growth in four years.

Investing.com has compiled a list of significant events likely to affect the markets this week.

Tuesday, August 28

The U.S. is to release reports on the trade balance and consumer confidence.

Wednesday, August 29

The U.S. is to publish revised second quarter GDP data as well as figures on pending home sales.

Thursday, August 30

New Zealand is to produce data on business confidence.

Australia is to release reports on capital spending and building approvals.

In the euro zone, Germany is to publish preliminary inflation figures.

Canada is to release what will be closely watched figures on second quarter GDP growth.

The U.S. is to produce data on personal spending along with the core PCE price index, which is the Fed’s preferred inflation measure.

Friday, August 31

China is to publish reports on manufacturing and service sector activity.

The euro zone is to release preliminary inflation data.

The U.S. is to round up the week with a report on business activity in the Chicago area.

 

Further Reading

Copper Transfixed by Currency Swings With Record Link to Yuan

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Jim Williams

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