The resumption of trade hostilities between China and the U.S. sent the markets into a spin yesterday.
The resumption of trade hostilities between China and the U.S. understandably sent the markets into a spin yesterday, not least because they exposed the all too obvious: Given the strength of its position in rare earths, something we began discussing on Capital Matters at least as early as 2021 (and it was hardly a secret then), China has, as George Costanza put it, “hand.”
We should not miss the fundamental point on rare earths: China has crafted a policy that gives it the power to forbid any country on Earth from participating in the modern economy.
Hyperbole? Not so much. Optimists, if that is the right word, will see that as the reason that the U.S. will bring this fight to a quick end. Pessimists will think about what the deeper implications of that might be.
The S&P was down nearly 3 percent yesterday, admittedly from a historically high level, but still . . .
The dollar (as measured by DXY) took a hit too, and gold had (another) good day. Over to economist Robin Brooks:
Markets are again thinking that the US holds the shorter straw in the tariff fight with China. Yesterday’s fall in the Dollar is especially notable because the S&P 500 fell sharply. That kind of risk-off usually buoys the greenback. Much like on April 2, gold prices rose, so there is once again an exodus into gold as investors seek a safe haven. Yesterday’s price action marks an important turning point, because the Dollar had been stable in recent weeks as gold prices took off. That ended yesterday.
I wrote a bit about Brooks’s earlier comments on dollar stability here.
And no, this is not a good time to cut interest rates.