Risk Sentiment Softens Again
Risk assets were heavily lower midweek on Wednesday. The trade war between the US and China ratcheted up another level on more aggressive rhetoric from China. Despite raising its retaliatory tariffs by 25% on $60 billion worth of US goods, China has up to now refrained from sounding too confrontational in its commentary around the trade war.
Last year, both sides were guilty of increasingly hostile rhetoric. This weighed heavily on investor sentiment and worsened relations between the world’s two largest economies. However, this week, China returned to a more adversarial tone. They even threatened to drag rare earth minerals into the trade war.
NDRC Suggests Rare Earths Ban
China’s planning body, The National Development and Reform Commission, has suggested that they could use rare earth exports as leverage against the US. This category refers to a group of 17 metals used as components in high technology applications such as magnets, instrument displays, and other operations.
China dominates the global supply in this category of exports. In fact, the international community only noticed this as a potential security threat when China restricted supply quotas around 10 years ago.
Retaliation For Huawei Ban
The announcement is clearly a retaliatory one from China in the face of Trump recently adding Chinese tech giant Huawei to the US “Entity List”.
As part of the list, US companies are banned from dealing with Huawei unless they have US government approval. Shortly after the ban was announced, Google declared that it would no longer be dealing Huawei. A host of smaller companies such as Qualcomm followed.
Following a state visit to a rare earth magnet firm in Ganzhou by Chinese Premier Xi Jinping last week, the NDRC put out a notice which read:
“Will rare earths become China’s counter-weapon against the US’s unwarranted suppression? What I can tell you is that if anyone wants to use products made from rare earth to curb the development of China, then the people of the revolutionary soviet base and the whole Chinese people will not be happy”.
Rare Earth Security Threat
Although the NDRC didn’t explicitly threaten action, the implications are purposefully clear. Currently, China doesn’t export a lot of rare earths to the US. Instead, intermediate products containing rare earths go through a long production chain, using Japan, before arriving in the US.
However, the US has identified these exports as a weakness. And, as such, they have been excluded from current tariffs.
Steve Bannon Urges Trump To “Go All The Way”
Former White House chief strategist Steve Bannon has urged President Trump to “go all the way” saying:
“It’s not a trade war, its an economic war they’ve been running against the West… You cut off the access to the capital markets and you cut off the access to technology, they fold immediately”.
Asked whether he thinks Trump will back down, Bannon said:
“I don’t think Trump backs off for a second [as the conflict] is about fundamentally changing the Chinese economy so they can work with the free market economies of the West… You have two systems right now that are incompatible.”
The SPX500 has broken down through some key level in recent weeks and is now turning lower once again moving back below the shelf of support at the 2816.15 level. You can see that price has broken through the rising trend line support. This can be viewed as the neckline of the sloping head and shoulders pattern suggesting further downside to come. Below here, focus is on a run down to the next structural support at the 2744.13 level. Bulls will need to see a break back above the 2856.30 level to alleviate the near term bearish bias.