Geopolitical tension seemed to reach a tipping point at the end of last week after President Trump threatened to implement 5% tariffs on Mexico from June 10. In his latest attempt to curb what he styles as a "crisis" at the border, President Trump has said import tariffs will rise a further 5% every month (to a maximum of 25%) until Mexico acts against illegal immigration into the US.
Economists in North America noted that tariffs against Mexico would have a more significant impact than a trade war with China as Mexico is the US's third largest trading partner. Moreover, because of the North American Free Trade Agreement, the supply chain between the US, Canada and Mexico is highly integrated.
The President's announcement follows China's threats last week to reduce exports of its rare earth metals, which would severely cripple the supply chain for many international companies. If carried out, either threat raises the likelihood of a significant economic slowdown. Concern over an impact on global trade has already impacted the price of oil, with the benchmark Brent Crude price falling 10% in May to below US$65/bbl.
After a lacklustre performance for much of last week, President Trump's announcement saw the gold market finally live up to its potential as a safe-haven asset. Most of the price improvement came in late trading, and the metal had actually closed in London on Friday little changed on the week at US$1,281/oz.
In the US, however, gold prices closed up US$17/oz on the day, with the precious metal ending the week at a two-week high of US$1,305/oz. The metal seems likely to appreciate further, with August gold futures trading at over US$1,309/oz despite the US dollar index being near a two-year high. Gold's performance is helped by low interest rates, with US 10-year bond yields at their lowest level in 21 months at 2.16%.
Beijing last week threatened to ban the export of their rare-earth metals to the US. The references came from China's National Development and Reform Commission, which issued a bulletin that highlighted the potential of a cut in export quotas.
China currently accounts for over 80% of the global supply of this group of 17 chemical elements (the 15 lanthanides plus scandium and yttrium), which are crucial constituents in high-technology applications. Most of China's rare earth exports, however, are not traded directly but through intermediate or downstream products (many produced in China), so it is not clear how any reduction in quotas would work.
Iron ore was also in the news last week, with the metal touching a high of US$108/t on Tuesday. However, the steel-making metal fell sharply later in the week following the increased political threats to global trade, and closed in London on Friday down 3.7% on the week at US$99.8/t.
S&P Global Market Intelligence (SPGMI) expects a deficit of 36 Mt in seaborne iron ore this year, and 11 Mt in 2020, because of the mined-supply shortfalls in Brazil. Nevertheless, the company's Commodity Briefing Service on iron ore predicts global mined iron-ore production to increase slightly to 2,213 Mt this year, compared with 2,187 Mt in 2018. Brazilian production is expected to fall a net 54 Mt compared with 2018, but SPGMI predicts that Australian production will reach 892 Mt. SPGMI's iron-ore analyst, Max Court, notes that stocks have fallen rapidly in recent months due to wet-weather disruption in Vale SA's northern system and the ongoing impact on the Brazilian company's southern system of the Brumadinho dam collapse in January.
It was a difficult week for the other major metals, with nickel down 3.4% at US$11,990/t, copper 2.4% weaker at US$5,828/t, zinc off 1.2% at US$2,527/t and aluminium slipping 0.5% to US$1,795/t.
The mood of international investors has not been helped by news that activity at Chinese factories slowed in May, and a key employment indicator is at a 10-year low. China's growth target is already below 6.5%, which is its lowest for three decades.
Moreover, it seems that China increased its subsidies to local companies by 14% last year to a record US$22.3 billion. These payments (sourced from the Wind financial database) will add to the strains in the US-China trade negotiations.
A leading official at the US Federal Reserve is quoted in the Financial Times as saying that the central bank could cut interest rates if the economic outlook takes a turn for the worse. Richard Clarida, Fed vice chairman, said the current 2.25-2.50% rate was appropriate because the country's weak inflation rate was expected to be transitory, but confirmed that the organisation was "very attuned" to prevailing international risks.
Brazil's economy shrank 0.2% in the three months to end-March. With Latin America's largest economy having contracted for the first time since 2016, there are increased fears of a recession on the continent. This scenario is not helped by inflation in Venezuela, which hit 13,000% last year. The country's GDP slumped 23%, year-on-year, in the third quarter of 2018 (the most recent data available), and this economic measure has now fallen every quarter since the start of 2014.
On a brighter note; led by the OECD, 42 countries have signed an agreement for the global governance of artificial intelligence (AI). The countries, which include the US but not China, are supporting a framework that commits the signatories to shared principles. These will address issues such as biased AI decisions and misinformation.