Trump 2.0 Stirs Commodity Market

As soon as Donald Trump took over the reins of the US presidency, the very foundation of global financial markets was shaken by his sweeping executive orders. The dynamics of commodities including gold, oil and copper have observed extreme volatility in recent days signalling a change in fundamentals. Traders are scurrying for cover and hedging instruments like gold are grabbing increasing portfolio percentages. Trump has inevitably stirred the global financial markets and the first few weeks in the White House may only be a small preview of his grand-scale plans.

Before Trump was announced as the next US President, he coined ‘tariffs’ as his favourite word and used it as a key tenet of his economic agenda during the 2024 election campaign. In his first tenure as President, Trump used import tariffs and other duties to drive the values of aluminium and steel. In his campaign speeches, he targeted other developed countries and elaborated that he had planned to introduce new duties from day one.

True to his word, he has come out all firing into his second tenure. In a no-holds-barred announcement, President Trump slapped 25% tariffs on most goods imported from Mexico and Canada while imposing a 10% additional tariff on all goods from China with effect from February 4. The White House defended the orders to advance the priorities of the USA on immigration and drug trafficking. However, at the time of this article, President Trump has agreed to suspend the orders against Mexico and Canada by one month but went ahead with the Chinese tariffs.

Gold soars amidst brewing storm

The implementation of tariffs has created supply and currency fluctuations across commodities. History supports US dollar and gold inverse relationship. However, safe haven demand of gold has inadvertently offset the impact of the US dollar which has appreciated over the past few weeks. The bullion has soared since Trump’s orders achieving an all-time high of $2,882.26 per troy ounce on February 5.

To add to the uncertainty, Canada, Mexico and China have announced retaliatory trade measures against the US, with China confirming it will bring up the matter at the World Trade Organisation. Traders have anticipated further geopolitical instability which could support the prices despite US interest rate hikes. On the domestic front, the price of gold has climbed from Rs 162,800 per tola on February 2 to Rs 168,500 on February 6, an increase of Rs 5,700 per tola as per the Federation of Nepal Gold and Silver Dealers’ Association.

Oil declines due to trade uncertainty

Price of crude oil has fallen on the back of trade uncertainty. Trading at $74.14 per barrel on February 2, the prices dropped to $70.43 per barrel as trade uncertainty gripped the market fundamentals. The effect of tariffs on the global energy markets is unfolding in phases with China imposing 10% tariff on US crude oil imports as a retaliatory effective from February 10.

Out of its total crude purchase, China’s 2024 crude oil imports from the US accounted for 1.7%. The resulting supply drop combined with other tariffs on US coal and natural gas could shift trade flows. In recent times, the US has been expanding its crude exports to China after signing a trade agreement under Trump’s first term. However, these new tariffs could reverse the gains.

If the law is passed, Canada would face 10% tariffs on energy commodities, lower than the 25% proposed on all other goods from Canada. However, the restrictions were temporarily stopped on February 3 following assurances from both the governments of Canada and Mexico to increase border enforcement officials.

Copper rises

As the sentiments reversed and tariffs on Canada and Mexico paused, the prices of copper increased. The delay of the US in imposing 25% tariffs on imports of Canada and Mexico eased concerns of a trade war lifting the prices of industrial metals. Market participants remained cautious about the developments from the US. As China remains closed for the Lunar New Year holiday, prices of base metals were pressured by concerns over a drop in the demand from China.

US agricultural products concerns

Facts prove that the US farming sector is one of the largest suppliers in the world. Hence, any trade disputes will unravel price volatility which will be coined as not ideal for the agricultural sector in the US. In the long run, tariff disagreements also erode a country’s market share and business in key destinations. Ironically, China, Mexico and Canada, all targets of Trump’s tariffs, account for nearly half of all agricultural exports. The nations are the leading buyers of US corn and soybeans.

Conclusion

Trump 2.0 has resumed shaping the global financial markets in no uncertain terms. Given that he is a few weeks into his Presidency, the times ahead bring an environment of uncertainty and volatility to the commodity markets. Analysts warn that commodity markets must now factor in higher tariff risk premium supported by the White House as Trump’s willingness to implement aggressive trade measures are apparent.