Impact of US-China trade war on commodities market

Impact of US-China trade war on commodities market
Written by:
Damian Wood
12th December 2019
Updated: 11th March 2020
  • The ongoing China-US trade war is causing a global industrial recession.
  • Essential commodities such as crude oil are already being affected by the current unfavourable trading conditions.
  • Experts warn of a similar, if not worse market environment in 2020.

The world is going through an industrial recession, thanks to the ongoing US-China trade war. Since the intrinsic demand is not sufficient enough to sustain the economy’s liveliness, equity banks are relying more on central banks to restore the balance. Monetary authorities worldwide are initiating easing mechanisms that will offset the adverse effects of the ongoing trade war.

The Fed’s decision to cut interest rates appears not to have delivered the anticipated impact even as investors warm up to looser credit terms. But perhaps the big question is: how long can the Fed and central banks keep up with the stimulus before the markets come to terms with the reality of the trade war?

Already, commodities such as crude oil that are cycle-sensitive are being affected by the unfavourable trading conditions. Brent is displaying a weak performance even after OPEC reached an agreement to cut supplies until the end of next year’s first quarter. Experts believe that the demand for essential commodities such as crude oil will fall in tandem if the trade war between the world’s biggest economies fails to come to an end soon enough.

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On the other hand, the current economic recession seems to be favouring gold. The precious metals are taking strong positions in the wake of easing measures by central banks to help counter the disinflationary effect of the US-China conflict.

Gold as a haven is boosted during harsh economic times characterised by low-interest rates. During such conditions, the cost of holding a non-interest yielding asset such as gold is relatively low. This means that as the conflict persists and as central banks cut the rates further, the demand for gold will continue rising.

One of the most sort-after metals this year is Palladium. The metal’s value has been on the rise as it is used as an input in producing catalytic converters to aid in reducing auto emissions. And with the rising global cars production and export, Palladium has remained bullish for the better part of 2019. However, the escalated trade war and China being a substantial consumer of the metal destabilised the demand for the metal since August this year.

Analysts remain a worried lot as we approach 2020 with several warning of far worse effects of the trade war.

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