THE notion that the gentle flap of a butterfly’s wings can cause chaos on the other side of the world is well known. But commodity markets have been tested in recent weeks by what could be called the 800-pound-gorilla effect: the idea that chest-beating in the White House can unleash turmoil in global metals, agricultural and energy markets.
President Donald Trump has slapped sanctions on Russia’s biggest aluminium producer, Rusal, intensified a trade tiff with China and tweeted a gibe against OPEC, the oil-producing cartel. His actions have shaken commodity markets at a time when speculation in futures is near the record heights of 2012, making markets even more volatile (see chart). Aluminium, nickel and palladium prices have soared and then plummeted. Soyabean markets are under threat. Oil prices are at their highest levels for more than three years.
Physical trade has been affected too, with some shipments to Rusal of bauxite and alumina, the raw materials of aluminium, suspended for fear of sanctions-busting, and cargoes of American sorghum to China diverted in mid-ocean because of Chinese trade restrictions. Pushing oil prices yet higher is the possibility that Mr Trump could impose sanctions on oil shipped from Iran and Venezuela next month, tightening the global supply of crude just as America’s summer driving season starts. Geopolitics has often upset global trade in commodities. But rarely has America’s government been such a source of upheaval across so many markets.
Metals have suffered most directly. From April 6th, when America’s Treasury prohibited Americans from dealing with Rusal and its boss, Oleg Deripaska, and threatened sanctions against non-citizens who traded with them, aluminium prices rose by more than 30% as buyers scrambled for non-Russian metals. Then on April 23rd, when the Treasury temporarily softened the proposed sanctions to spare “the hardworking people” of Rusal and its subsidiaries, and said it might lift them on Rusal if Mr Deripaska ceded control, they gave up around half of those gains.
Nickel prices also soared until April 19th on expectations the sanctions could extend to Norilsk Nickel, a Russian producer. José Cogolludo, global head of commodities at Citi, notes bashfully that shortly before the sanctions-related rally, the bank had been telling investors that nickel prices would hit $16,000 a tonne by 2020. They reached $17,000 in days—before falling back when the sanctions were eased.
Mr Cogolludo says that hedging of metals reached unprecedented levels as corporate clients sought to protect themselves during the price moves and speculators tried to cover short positions. He adds that computer-driven models, which account for most speculative activity in metals markets, respond quickly to market signals but are rarely good at deciphering geopolitical risk. This may have led to overshooting.
Agricultural commodities have suffered collateral damage from trade tensions between America and China. After the Trump administration imposed tariffs on steel and aluminium imports in March, in mid-April China announced a 179% preliminary anti-dumping duty on imports of American sorghum, a niche animal feed. This stopped American exports, which account for almost all sorghum entering China, in their tracks.
More significantly, China responded to an American proposal in April to slap 25% tariffs on 1,300 goods from China by threatening similar levies on 106 American imports, including soyabeans and cotton. According to Stefan Vogel of Rabobank, 35% of China’s 97m tonnes of soyabean imports come from America, which are not easily replaceable. So the market is betting that China will not carry out its threats. But if traders are wrong, and a tariff war breaks out in earnest this summer, the disruption could be severe. He says prices of soyabeans in America would plummet. Those of soyabeans in South America, spared the Chinese tariffs, could soar.
Some say that Mr Trump is showing a pattern of making threats and then backtracking, which creates noise but does little lasting damage. That view may be tested in the oil markets on May 12th. The president has threatened to reintroduce sanctions on Iran unless Britain, France and Germany agree to renegotiate the Iranian nuclear deal by then.
Some oil bulls say Mr Trump’s nomination of Mike Pompeo as secretary of state and his appointment of John Bolton as national security adviser—both Iran hawks—have made sanctions likelier. These could remove at least 500,000 barrels a day of Iranian oil from a market that is already looking tighter because OPEC and non-OPEC producers have restrained output. Abhishek Deshpande, head of oil research at J.P. Morgan, says such sanctions could raise average annual oil prices by about $10 a barrel (Brent crude has been trading near $75). Additional measures threatened against Venezuela if elections on May 20th are not free and fair could squeeze the market yet more.
But Bob McNally of Rapidan Energy Group, a consultancy, argues that the impact of higher petrol prices on American drivers may persuade Mr Trump to accept compromises on Iran and Venezuela. Nerves ahead of mid-term elections, he reckons, explain the president’s first tweet aimed at OPEC. On April 20th Mr Trump blamed the cartel for “artificially very high” prices—although high prices are also a windfall for American shale producers.
OPEC ministers, disturbed by the tweet while at a birthday party in Jeddah for the organisation’s secretary-general, Muhammad Barkindo, were not conciliatory. They claimed, however implausibly, that they were not trying to rig oil prices. But they should beware taking Mr Trump’s ability to mess with the markets too lightly. With bullish bets on oil prices near record highs, it would not take much to trigger a sharp reversal. Just ask metals traders: the 800-pound gorilla can trash prices as well as push them up.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
Page not found | The Economist
Cowboys for Trump founder arrested after allegedly leading Capitol rioters in prayer
Biden picks Rohit Chopra to lead consumer protection agency
'Bring it on!' Britons back Boris to make UK the 'Singapore of Europe' with new freedom
SoftBank Vision Fund losing Jeff Housenbold, who led DoorDash deal
release of fourth quarter, full-year 2020 GDP
How to use your iPhone’s health-tracking features
Coolest Apple stores around the world
Iran jails U.S. businessman, possibly jeopardizing Biden’s plans for diplomacy with Tehran
Afghanistan: Gunmen kill two female Supreme Court judges in Kabul car ambush | World News
YouTube slow to deplatform Trump versus Facebook, Twitter
Latest News3 days ago
Spectacled ‘Paddington’ bears venture out at Machu Picchu | World News
Latest News1 week ago
Search and rescue operation in Indonesia after contact was lost with Boeing plane | World News
Politics7 hours ago
The stakes are high for Biden’s inaugural address. Here’s what to expect.
Politics1 week ago
Global Britain can strike new post-Brexit path as Biden ‘seeks to heal relations'
Latest News1 day ago
Biden inauguration: Former FBI boss James Comey warns of serious threat from ‘armed, disturbed people’ | US News
World1 week ago
Kotak Mahindra AM on sector outlook, Covid impact
World1 week ago
Moderna Covid vaccine approved for use in the UK
World1 week ago
Bitcoin rally FOMO has retail investors flocking to crypto