Global trade tensions at the forefront – BBH

According to Marc Chandler, Global Head of Currency Strategy at BBH, it is trade wars, which have captured imagination and while trade tensions have increased, these still seem to be low rungs on the escalation ladder.   

Key Quotes

“So far, the trade actions cover a very small part of global trade and a small part of US trade. Announcing details of previously announced measures should not count as fresh escalation.  However, with China's retaliation, the ball is back in the US court.  Should the US retaliate now, the provocation would be an escalation.”

 “However, there are real wars taking place that are not simply metaphors.  Yesterday, Houthi rebels in Yemen struck a Saudi oil tanker with a missile.  The attack in retaliation for a Saudi strike on the only Yemeni seaport controlled by the rebels.  Saudi Arabia has led a coalition that has been bombing the Houthis and their allies for three years.”

“The Houthis do not have an air force, but they have supplied with missiles, ostensibly from Iran, which have been used against Saudi Arabia. Last month they struck with seven missiles.”

“The conflict is generally understood as an expression of the underlying conflict between Iran and Saudi Arabia.”

“Following the precept that the enemy of my enemy is a friend, there seem to be a rapprochement between Saudi Arabia and Israel.  The Crown Prince Mohammed bin Salman (MBS) is changing both domestic and foreign policy.”

“Several new US Administration officials look to sharpen the US confrontation with Iran.  At the same time, Iran and Russia are improving ties.  Iran may either join or enter a trade agreement with Russia's "Eurasian Economic Union".   As the rival blocs are hardening, it is noteworthy that OPEC is staying united.  Indeed, if the nuclear deal with Iran is scuttled, and sanctions against Iranian oil is reinstated, it may be positive for oil prices and the fear of such a scenario may have helped lift oil prices recently.”

“Trade tensions are negative for oil prices, if for no other reason than it is perceived to weigh on world growth.  WTI for May delivery has fallen to a two-week low near $62 today.   A trendline off the mid-February low comes in slightly lower today and is rising 10 cents a day and will be at $62 at the end of the week.  Oil prices have been rising since mid-2017 (~$44.45) and the high reached in late March (~$66.50) appears to have completed a move.  Technical indicators warn the risk is on the downside.”

“US oil inventories fell in two of the last three weeks of the Q1.  However, one of the reasons US inventories are falling is that exports are rising.  At the end of March, US crude oil inventories rose to a record of 2.18 mln barrels a day.  The US is exporting a little less than a fifth of its production.”