So, the latest round of new tariffs have been slapped on Chinese goods, in a move that was widely trailed by President Trump. Broadly speaking, markets took the news in their stride, partly because it was already priced in, and partly it was because at 10% the initial tariffs aren’t as severe as they might have been.
Still, the dollar has pulled back somewhat in markets, with gold now once again consolidating above the USS$1,2000 mark and sterling hitting a three month high. The latest bout of dollar weakness presents some welcome relief to emerging market currencies too, albeit that it’s likely to be short lived.
The rand has gained 4% in recent days, the Turkish lira has eased up slightly, while the Argentine peso has also enjoyed a slight fillip. Overall though, these and other emerging market currencies have been severely punished over the past few months and there’s little likelihood of much further relief in the short-to-medium term.
Markets expect the Fed to continue with its stated policy of interest rate rises, with a quarter point rise most likely at the next Fed meeting. Looking into next year, more rises are likely, although opinions differ as to the number and extent of the rises. Goldman Sachs is expecting a greater overall rise than the consensus, but either way, the pain will be felt in emerging market currencies.
In South Africa investors can now legally seek solace in marijuana, following its de facto legalisation this week [https://www.bbc.co.uk/news/world-africa-45559954], but for those looking for more mining-related commodity upside it’s always worth considering that costs denominated in weakening local currencies to create metals products priced in the strengthening US dollar allows for theoretically larger margins, all other things being equal.
It’s not always that simple, as in the relatively illiquid chrome market, where buyers cotton on pretty quick to the costs savings that miners are making, and exert downward pressure in their pricing negotiations.
But for markets that trade on spot, like copper, gold and most of the major metals, all of which are produced in significant quantities in South Africa, Turkey and Argentina, the widening margins on offer can be very attractive.
On the flipside, of course, if the dollar gets too strong it can have a negative impact on the commodities prices themselves, and in particular on gold. But as it stands the overall strength in the global economy is likely to push demand to such a point where dollar strength is more than compensated for.
Whether equities prices ever really reflect this subtle dynamic is open to question, but it’s certainly true that wider margins can create a broader underlying confidence in the financial health of a company.
Perhaps a more open question is where the US economy is really going? With rising rates, yield curves may start to look a little bit out of kilter as short-term US treasury bonds end up yielding more than long-term bonds. That dynamic is typically viewed as a harbinger of recession, and it will be something that Fed chief Powell will want to keep a close eye on.
Indeed, it’s an interesting position to be in. On the metrics of growth and employment rate rises are essential if the economy is not to overheat. But if the structure of US debt markets starts to be called into question then all bets will be off.