Tariffs have punctuated the age of Trump 2.0, and their impact on the diverse commodities landscape could shake investor portfolios for years to come.
The President was quick to place 25% tariffs on imports from Canada and Mexico, and a 10% levy on China, citing factors like illegal immigration and the drug trade as catalysts for the measure.
Canada and Mexico promised retaliatory measures, while China suggested that it would challenge the levies at the World Trade Organization as well as adopting other countermeasures. This souring of trade relations points to a possible protracted trade war which could threaten to drive inflation rates higher.
The tariffs have prompted volatility through various commodity markets, but what will the impact be on commodities once the dust settles?
Tariffs Turn Wall Street Jittery
Tariffs have long been a core component of Trump’s economic strategy, and the measures formed a strong part of the President’s campaign trail.
While Trump has been vocal about the reasons behind the tariffs having been prompted by illegal immigration and the flow of fentanyl into the United States, he has also called the word ‘tariff’ the “most beautiful word in the dictionary.”
Although tariffs don’t always cause a stock market downturn, and Trump’s use of tariffs during his first term didn’t prompt sustained panic, investors have been caught off guard by the President’s tactics, having anticipated a more measured approach.
Given Trump has secured Republican control of the Senate, House of Representatives, and Congress in a clean sweep in the election, it appears that the President is more eager to deliver on his promises or threats than in his previous term.
The relative strength of the S&P 500 also appears to have given Trump more confidence to pressure markets before easing off as prices fall. However, the approach may lead to sustained corrections from the high valuations we’ve seen of late.
Even in an environment where the enforcement of the sweeping tariffs promised is far from assured, the mere threat of levies has unsettled commodities markets.
Data shows that traders on COMEX locked in pre-tariff prices, while skepticism brings a wider sense of stability. However, the LME, which operates on physical deliveries, has experienced a series of disruptions as fears over global tariff implications have led to more anticipatory purchasing, triggering price movements even in copper, which is more susceptible to inflationary impacts.
Is this trend of uncertainty here to stay for commodities trading in Trump 2.0? It appears that many different forms of commodity could be impacted by tariffs in the months and years ahead.
The Uneven Impact on Commodities
Seemingly the best place to start would be metals. With Trump promising a 25% tariff on aluminum and steel coming into effect on March 12 with no exceptions, we’re set to see widespread volatility throughout metals markets.
With Canada responsible for 50% of the aluminum imported into the US in 2024, Trump’s decision to implement the tariff to encourage domestic production will see considerable initial strain that’s likely to create price inflation.
Canada has also promised to retaliate to the tariff, which could trigger more of a skirmish in what may be a protracted trade war.
Fortunately, we can look to history for indicators as to what could happen for steel and aluminum prices. When Trump announced tariffs of 25% on steel and 15% on aluminum during his first term as President in 2018, we saw price volatility move higher.
Tariffs raised the average price of steel and aluminum in the US by 2.4% and 1.6% respectively. However, in 2018, Trump added a series of exemptions for countries like Canada, Australia, and Mexico. Without these concessions, we could see costs range far higher.
Analysts have been uncertain about other commodities. Barclays suggested that higher costs of oil may be driven by all three parties in the supply chain, from Canadian producers, refiners largely in the Midwest, and end-consumers all paying more for costs.
The analysts concluded that tariffs are generally bad news for oil because they weigh on demand and boost the value of the US dollar, complicating trade further.
Likewise, CITI analysts suggested that precious metals like gold and silver could grow in value as a safe haven against market uncertainty. However, they concluded that the outlook for copper is altogether more bearish.
Navigating Commodities
Because of the unpredictability of Trump, investments in commodities are likely to be more volatile than those in more traditional securities, particularly if leverage is involved.
The value of commodity-based derivatives could also be impacted by wider market movements, commodity index volatility, interest rate changes, and other industry factors resulting from adverse weather events and climate change.
Tariffs could add to widespread uncertainty surrounding commodities that could be a concern for the prospects of short and long term investment opportunities but may allow some joy for traders hoping to react fast to volatility moving forward.
With the right access to a prime services provider, institutional investors can use low-latency trading opportunities to their advantage, and use tariffs as an added incentive to trade volatility.
Opportunities in Uncertainty
Much has been made of the impact of tariffs, but it’s important to note that a prospective trade war is far from a black swan event like the 2008 financial crisis or COVID crash, and instead, the fallout from tariffs is more likely to signal a multi-faceted, long-term economic shift.
Institutional investors can take advantage of tariffs by adapting their portfolios early and utilizing analytics to create a more holistic overview of shifting market sentiment.
When it comes to the convoluted world of commodities, tariffs can shake up short-term outlooks for a range of different metals, fuels, and soft commodities, and there can be some significant opportunities to be taken in trading the uncertainty of Trump’s actions in a proactive manner.
