As the 11th round of US-China trade talks ended, markets reacted poorly to the absence of a deal and the threat of an increase in tariffs. Commodities followed equity and bond markets lower, with our Materials price index dropping 0.4% for the week.

The fall in the MPI was broad based with seven of the MPI's ten components retreating last week. Chemicals on the other hand moved up for the fifth consecutive week by 1.7% as production capacity remains shuttered in the US. Freight prices too showed a 3.4% gain as bulk rates recover from the Q1 shock. Materials closely linked to China suffered the most last week. Non-ferrous metals, for example, fell 2.9%, their fifth consecutive weekly decline. Fiber prices also lost ground, falling 2.1%. Chinese textile and fabric imports are a particular target in the List 3 tariffs that will now be increasing from 10% to 25%. Oil prices eased back again this week by 1.6%, also because of trade related issues; however supply-side issues effecting Iran and Venezuela are maintaining pressure on crude and hence, we do not expect a sustained retreat in prices until late 2019 or 2020.

The breakdown in US-China trade negotiations is forcing markets to grapple with what could be a rupture in the world's largest and most important trading relationship. The problem is complicated because China is an important economic partner that has become fully integrated into global supply chains. The danger now sending a shudder through markets is that we may be looking at a process that sees these two economies disengaging. Could conditions become worse soon? A decision on 232 auto and auto parts tariffs is due within a week.

Posted 15 May 2019 by Mr. William May, Senior Economist Pricing and Purchasing