THE CHART SHOWS LME 3M CU AND THE S&P 500 REBASED TO 100% ON 2 JANUARY 2019 Unlike copper, US equities have shrugged off trade war fears this year, with the S&P500 up 20% by end July.

Despite good US jobs figures, US equities hitting new highs and US Fed Funds rates at just 2.5%, the Fed still delivered a 25bps cut having warned of trade war dangers back in June.

If past experience is any guide, then financial markets may sell-off during August and then rally in early September in anticipation of another 25bps cut at the mid-Sept FOMC?

The chart shows LME 3m Cu and the S&P 500 rebased to 100% on 2 January 2019

Chart 2: LME 3m Cu and S&P500 rebased to 100% on 2 Jan 2019

TRADE WAR AS ELECTION STRATEGY After Congress blocked funding for the Mexican wall this year, the “trade war” has risen in the political agenda, suggesting that a “demonstrable win” over China has become central to Trump’s re-election strategy.

The subdued copper reaction to July’s meeting in Shanghai may reflect suspicions that the US won’t push for an early trade agreement, preferring to delay until just before the November 2020 presidential election, to allow the electorate to ride a bull market into this election.

Repeatedly confronted by Trump on trade, the Chinese don’t face election pressure so can take the longer view. This trade war may even prove useful, offering an opportunity to flex muscle whilst taking some steam out of their domestic economy, and they show little sign of backing down.

Indeed, the Chinese stance toughened in May, flagging their dominance of rare earth metals essential for global tech applications, and the People’s Bank of China allowed the Yuan to fix below the key 7.000 level vs US$ on 5 August, after Trump threatened 10% tariffs on the remaining $300bn of Chinese imports from 1st September.

Source: Reuters/ADMISI

15 | ADMISI - The Ghost In The Machine | July/August 2019

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