Yesterday’s sell-off in the oil and equities markets was a significant event.
It was not caused by any new factor entering the global equations, rather it was the result of a major shift in perception concerning how long the US-China trade wars will continue – and how bitter they are going to become.
What was previously assumed to be a short term problem is suddenly now being seen as an indefinite, growth-sapping global economic warfare, which is fast sucking all other countries into its slipstream.
It was not so long ago that we were hearing how negotiations were going well and that a deal was on the radar. The markets were then clearly still anticipating an eventual long term continuation of the good news in spite of some inevitable near-term bruises and grazes here and there such as the US agricultural industry and car sales in China, etc.
But then it all began to fall apart:
- The US accused the Chinese of reneging on various parts of the forthcoming deal that had apparently already been agreed. The Chinese denied this
- The US imposed large additional tariffs on Chinese imports
- China retaliated with more tariffs on US imports starting June 1
- US threatened even more tariffs covering almost all Chinese imports
- US starts to target Chinese companies that rely on US technology, starting with Huawei
But the markets still saw this as a short-term battle that will soon be over. But then the doubt started to creep in:
- There are no plans at present to resume negotiations
- Chinese President XI Jinping talks of a long marathon saying “We are here at the starting point of the Long March to remember the time when the Red Army began its journey. We are now embarking on a new Long March, and we must start all over again!”
- Then yesterday, a Chinese Ministry of Commerce spokesperson stated that “If the U.S. would like to keep on negotiating it should, with sincerity, adjust its wrong actions. Only then can talks continue,”
But, as usual with these things, the catalysts for the big moves were also present. These changing perceptions on the trade war duration comes a day after the EIA reported another big increase in US crude oil stocks. Whilst the state of US oil stocks is not the entire global situation, it is the most visible. It also happens to coincide with notable evidence of the trade war hitting the U.S. economy. The data released by IHS Markit reported manufacturing growth is at its weakest pace of activity in nearly a decade and new orders fell for the first time since August 2009.
As we’ve said before, oil markets have been pincered between bullish geopolitical supply risk factors and the bearish prospect of declining global growth and the associated drop in oil demand. It seems at present that it is the concern over the state of the world’s economic health that is prevalent.
But although we saw significant downward moves in both oil and equity markets yesterday, these are still far from being classified as a ”crash”. Right now we can say we are factoring in a revised duration and depth of the problems, and the possible degree of associated pain, but that the final outcome is still seen as ”worth the expense”.
But the sentiment has been dented and that makes us very vulnerable to self-fulfilling negative reactions to further bad news, and the impact of the latest round of tariff increases is not even appearing in data releases yet - and the latest Chinese tariff increases have not yet even commenced.
Bumpy rides ahead…