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Latest Round of Tariffs Puts the Brakes on Copper’s Rally

Latest Round of Tariffs Puts the Brakes on Copper’s Rally

That momentum we saw last week for the price of copper quickly disappeared at the start of this week thanks to new tariffs put in place by both the U.S. and China on Monday. The copper market saw a near immediate reaction as copper tumbled yesterday and London copper prices slid for a second session already this morning with the market dropping more than 2 percent.

Copper moved a whopping 7.99% higher last week and closed at $2.8575 per pound on the December futures contract on the heels of falling inventories. If you prefer to follow copper by the ton, the red metal climbed to its highest since July 10 at $6,382.5 a ton on Friday. Copper opened this morning at $2.82 per pound. Three-month copper on the London Metal Exchange dropped to $6,214 a ton. You can click on the chart below for up-to-the-minute pricing.

As you likely already know, the United States and China imposed fresh tariffs on each other on Monday as the world’s biggest economies showed no signs of backing down from an increasingly bitter trade dispute. U.S. tariffs on $200 billion worth of Chinese goods and retaliatory tariffs by Beijing on $60 billion worth of U.S. products took effect at midday Asian time on Monday.

“Rising trade tension put a stop to the rally that emerged late last week in the base metals sector,” ANZ said in a note. “China also called off planned talks with the United States, with the chances of anything happening before the U.S. midterm election now highly unlikely.”

President Donald Trump hinted earlier that the trade war won’t end any time soon, and said in an interview with Fox News that it’s time to “take a stand on China.”

“Eventually the trade wars are going to come back to bite the U.S.,” Bank of America Merrill Lynch’s head of global commodities and derivatives research Francisco Blanch told Investing.com. “It could take longer, it could take shorter, eventually it’s going to happen, but maybe the Fed acknowledges it sooner, which is what people are going to be looking for in terms of getting more bullish on gold. We know that trade wars are not good for the economy.”

Speaking of the Fed – while the trade war continues its give and take, the Fed will take center stage tomorrow. The FOMC will convene and issue their decision, statement, and Chairman Powell will conduct a press conference following the announcement on Wednesday. Analysts say all of the economic data when it comes to GDP growth, unemployment, inflation, and optimism point to two more 25 basis point hikes in the Fed Funds rate. The first is expected tomorrow, and the second at the December meeting. The Fed Funds rate could stand at 2.25-2.50 percent by the end of this year if the Fed follows through on their guidance from the June meeting.

The Trump administration has pushed for a more cautious approach to rate hikes as the President believes they work counter to his initiatives for economic growth via tax and regulatory reforms. At the same time, higher rates would push up the value of the dollar versus the euro and other world currencies which works contrary to the current attempt to level the playing field in international trade.

A stronger dollar makes U.S. products less competitive in global markets. We will find out if the Fed plans to conduct monetary policy via economic data, which favors two rate hikes, or politics and the wishes of the administration, which advocates a more gradual approach. In either case, markets are likely to move after tomorrow’s meeting.

We will keep an eye on the tariffs, the Fed and the end of Q3 as it wraps up Friday.

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Jim Williams

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