Global Market Update: US-China Trade Tensions, China's Deflationary Pressures, and Precious Metals Surge

Ongoing US-China trade tensions intensify, driven by new threats from former President Trump regarding edible oil and retaliatory measures, leading to market volatility and concerns for global economic stability. Concurrently, China grapples with persistent deflation, indicated by falling PPI and CPI, while gold and silver prices soar amidst a risk-off sentiment and anticipation of further Fed rate cuts.

Key Points Summary

• US-China Trade Tensions

  Former President Trump threatened to halt edible oil trade with China, viewing Beijing's prior soybean purchase restrictions as a hostile economic move. This threat, despite earlier assurances of de-escalation by Trump and US trade representatives, further intensified trade tensions and led to a negative reaction in the S&P 500 index. Both nations are applying pressure through measures such as China's sanctions on US companies and export restrictions on rare earth minerals, and Trump's proposed 130% tariff increase.

• Impact on US Agriculture and Trade

  Trump's potential trade actions and China's soybean purchase restrictions have negatively impacted US soybean farmers, who are already suffering from low agricultural prices. While the government promised aid packages for farmers, these have been halted due to a government shutdown, and farmers largely prefer a stable trade agreement with China over financial assistance. Imports of Used Cooking Oil (UCO) for renewable diesel production also stirred controversy due to concerns about depriving US farmers of domestic demand, with Trump proposing tariffs to support domestic producers.

• China's Soybean Market

  China remains the world's largest soybean buyer, primarily for its vast hog herds, maintaining strong purchases from global suppliers like Brazil and Argentina despite trade tensions with the US. September soybean imports reached a monthly record, indicating that Chinese crushers and feed producers have significantly strengthened their reserves.

• China's Deflationary Environment

  China's Producer Price Index (PPI) fell for the 36th consecutive month, declining 2% year-on-year, while the Consumer Price Index (CPI) decreased by 0.3%, signaling persistent deflation. The property market slump, overcapacity in industries, and weakened consumer demand are key contributors to this deflationary pressure, which the government is attempting to alleviate by curbing aggressive price competition among producers.

• China's Economic Outlook

  China, the world's second-largest economy, continues to struggle with deflation since the end of the pandemic, with its GDP deflator falling for over two years, representing the longest period since quarterly data tracking began in 1992. The outlook for Q3 GDP growth is anticipated to be slower than Q1, and while the official 5% target might be met due to strong initial performance, ongoing trade tensions and tariffs could hinder future growth by impacting its export-dependent economy as it seeks alternative markets.

• Precious Metals Rally (Gold & Silver)

  Gold prices surged to new records, reaching approximately $4193 per ounce, while silver hit a historical high of $53.5 per ounce after strong fluctuations. This rally is driven by heightened US-China trade tensions, a global risk-off sentiment, anticipation of a 25 basis point Federal Reserve rate cut, and decreased US Treasury yields, which typically benefit non-yielding assets. Low liquidity in the London silver market also contributed to its price surge, pushing prices above New York futures.

• Factors Driving Precious Metals Demand

  The demand for safe-haven assets like gold and silver is fueled by extensive central bank purchases, a doubling of ETF inflows over the past three years, and investor protection against macroeconomic risks such as the large US budget deficit and potential threats to Federal Reserve independence. Ongoing US Section 232 investigations into critical minerals, including silver, platinum, and palladium, also create market caution regarding potential new trade tariffs.

• Jerome Powell's Statements and Upcoming Data

  Federal Reserve Chair Jerome Powell reiterated that there is no risk-free path for monetary policy, expressing concerns about both the labor market and inflation. He also noted the potential impact of a government shutdown on data releases, emphasizing reliance on other available data. Upcoming economic data includes Eurozone industrial production (especially in Germany), the New York Fed Manufacturing Index, and the Beige Book, which will be crucial for assessing market conditions.

Under Details