Protectionism, Tariffs & Trading a Trade War

June 28, 2018 02:00 PM
Trade Wars & Volatility

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Commodity Cycle 

In the broader commodities market, the long-term pattern of the Thomson Reuters Equal Weight Continuous Commodity Index, which covers 17 different commodity futures, suggests an extended trading range from 2016 (see “This may last,” below). There is a major low every 15 years, but a major commodity boom only once every 30 years, and the interaction between them really makes the upside limits clear. There’s evidence for a boom about once every 30 years. This evidence can be found in the history of longer standing markets like cotton, copper and corn. The cycle outlook from the 2016 lows is not for another boom. The precedent from 2016 is the trading range from 1986, not the unfolding boom from 1971 or 2001. This sector is seeking out the upper reaches of an extended trading range and is not poised for another boom.

The warning signs – and the complex interrelationships of these markets – are there in the pricing patterns. Investors should take these into account as they form their outlooks for the near and longer term.

Big Picture 

Most people who trade and follow the markets see protectionism, tariffs and a potential trade war as bad for the markets. But trade wars are not necessarily a choice, but a reaction to fears in the economy. Those fears are real and clues of weakness can be divulged in market technicals. We suggest here that several sectors are showing evidence of a bubble, that bubbles always burst, and that one result of a burst bubble is always a rapid rise in collective fears. These fears create the perfect environment for global trade tensions. Subsequent market breakdowns are the result of this cycle and not simply a reaction to poor decisions on trade.  

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About the Author

Walter Zimmermann is the Chief Technical Analyst at ICAP-TA. He has been a cycle-based technical analyst from more than 30 years focusing on major markets and the petroleum complex.