It’s been a shockingly busy news week, what with riots in LA, another horrible Boeing crash in India, and speculation of Israeli military action against Iran. But perhaps the most important story was the round of US-China trade talks in London. The President gave us early warning of another successful negotiation from his Truth Social Account. President Trump told us that the U.S. would get “a total of 55% tariffs” with China’s tariffs set at 10%, adding that “Full magnets and any necessary rare earths, will be supplied, up front, by China. Likewise, we will provide to China what was agreed to”. A Chinese spokesman was more reserved. Lutnick referred to the agreement as a “handshake for a framework”, which didn’t seem entirely consistent with Trump’s assessment. Usually, in these matters, the best way of telling what happened is to look at the US-listed Rare Earth miners – MP Materials fell 8% yesterday, but was up 14% today, which might suggest that the market remains sceptical about China resuming rare earth supplies. We are often accused of being cynical, which may explain why we can’t shake the suspicion that the Chinese authorities are slow-walking negotiations on the Rare Earth supply. Their stated position is that they will supply for civilian use but not military. Is an acceptable compromise with the US possible? Who has the better hand?
Brad Setzer suggested that China may have better cards than the Administration thinks. China has done an excellent job of redirecting exports away from the US to its SE Asian trading partners. No doubt they are re-exporting to the US, but that’s something the WH will have to deal with when its SE Asian trade deals get negotiated. There are signs that the business environment remains tough, and Rare Earth supply disruptions (should they occur) will not do the automakers or defence contractors any favors. Importers like Marelli are already struggling with financing tariffs that have to be paid when goods land. We are sure that their private equity parent has a credit fund that can assist, once Marelli’s creditors suffer an appropriate haircut.
US equity markets appeared oddly uninspired by the recent better than expected CPI release. The figure encouraged a few rate cut bets to go back on after the recent slashing of rate cut odds. Are heady equity markets overvalued? Here at MI2, we will excuse you if you think that markets resemble a runaway Zebra, but perhaps bouyant markets are just reflecting the flow of funds, which have been counter-intuitively strong. Perhaps we should ignore what the WH says and just watch what they do?
