Apr 11 / Laleska Moda

Market remains highly volatile as trade war intensifies

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  • This week, the world saw an escalating on trade war as US has now a massive 145% tariff on all Chinese goods, while China imposed a 125% levy on American goods (by time this report was released), increasing the tensions and the fears of a global recession and plunging markets until Wednesday morning.

  • The 90-days tariff pause for most countries, except for China, brought relief to the market and led to a partial recovery of financial assets and commodities, but the tensions between the two largest economies in the world will likely keep the market pressured.

  • US Treasury bonds also recovered after suffering a sell-off in recent days. However, this raised the alarm of a weakness in the confidence of US assets, deepening the concerns over uncertainties and turbulence in the market.

  • Coffee futures followed the trend of the past few days, falling sharply on Wednesday morning, but recovering after the 90-day pause announcement. The recovery, however, could be capped by the uncertainties in the macro front.

  • The new economic outlook and the likelihood of a drop in US demand are likely to keep the coffee market bearish, even with the prospect of a smaller Brazilian Arabica crop in 25/26. A change in price direction could only come from new supply fundamentals.

Market remains highly volatile as trade war intensifies

*The tariff data used in this analysis was last updated at 3 p.m (BRL time) of the 11th.

Markets around the world continued to be highly volatile this week, as US President Donald Trump increased tariffs on Chinese goods, sparking the trade war. China was first taxed with a 104% tariff early this week, in which the Chinese government responded by announcing 84% tariffs on American goods and imposing restrictions on a further 18 US companies, bringing the total number of restricted companies to 60, on Wednesday (09).

China was not the only country that retaliated against the US. On Wednesday, 09, the European Union also agreed to countermeasures to the new levies, announcing a 25% tariff on many American products, including almonds, orange juice, poultry, soybeans, steel and aluminum, tobacco, and yachts. Canada also joined the retaliation with a 25% levy on some US goods. This sent markets - including coffee - tumbling around the world on fears of an escalating trade war and a global recession. This has led to increased uncertainty in the markets, even at a higher rate than during Trump's first term, especially as trade and cooperation between countries have declined, posing a significant risk for 2025.

US Treasury bonds were also affected, with a sell-off in longer-dated bonds widening the gap between 2-year and 10-year bonds to the widest since 2022, as the market feared that China and other countries might "dump" US Treasuries in retaliation. The movement could be an indicator that the confidence in the largest economy in the world is shaken. This also led to a depreciation of the dollar against the euro, yen and Swiss franc.

USA: Treasury Yields (%, YoY)

Source: Refinitiv

USA: Trade Policy Uncertainty Index

Source: Bloomberg

However, later in the day (09), Trump raised China's levies to a massive 125% and announced a 90-day pause on reciprocal tariffs, equalizing all tariffs from countries that did not retaliate to a universal rate of 10% on the same day, while negotiations between the world's nations and the US take place. Following this action, the EU also imposed a 90-day pause on its retaliatory measures pending negotiations.

The move completely turned the market on its head, with big gains in US financial markets and commodities, with the S&P 500 stock index rallying. US 10-year Treasuries and the dollar also rebounded after the announcement, with the former seeing strong demand.

Coffee futures also followed this trend. The Arabica and Robusta May/25 contracts hit multi-month lows on Wednesday morning – with the former trading below 340 c/lb and the latter below 4,780 c/lb – but regained ground in the following days. The May Arabica was back to 360 c/lb and Robusta to 5,100 USD/mt levels this Friday. However, a further recovery could be capped, as the trade war escalates.

LN Robusta (USD/mt), NY Arábica e Arbitragem (c/lb)

Source: Refinitiv

On Friday, after China announced 125% duties on US imports, the American government increased to 145% the tariffs on Chinese goods. So, while most of the economies around the world will temporally be ruled out of tariffs, the increased tensions between the two largest economies on the world will likely have negative effects in the world's economy but could have a significant impact on US, potentially affecting coffee demand.

Even before the duties announcement, there were already fears of higher inflation and slower growth in the country. The shocking announcement of the tariffs and all the uncertainties regarding their application and rates, which seem to change from day to day, have shaken confidence in the US and could lead investors to choose safer strategies and diversify away from US assets, as pointed out by some banks around the world. In this sense, it is good to remember that one of the largest foreign holders of US Treasuries is China, whose government could divest part of its share as it clashes with the American government, triggering more turbulence in the market, worsening the economic situation and consumer confidence.

For commodities such as coffee, this means that the risk of demand destruction remains high, as Americans could face higher inflation. Thus, the macroeconomic scenario is likely to keep the market under pressure, capping the recent rally after the tariff pause, at least until fresh news on the fundamental side comes to light. In the short term, the most likely support could come from fears of frost in Brazil as winter approaches.

In Summary

Since last week, the market has been whipsawed by Trump's "liberation day". After a lot of back and forth on the tariff rate and the countries to be affected, Trump decided to pause the tariffs for 90 days and equalize the rates at 10% across the board, except for China. After the Chinese government announced retaliatory tariffs of now 125% on American goods and restricted a further 18 US companies, the country now faces 145% levies on goods entering the US.

While the pause in other countries' tariffs has allowed the market to recover some of the losses suffered up to Wednesday, the general sentiment is one of uncertainty and turbulent times ahead, which is likely to maintain the bearish trend in commodities. The movements in US Treasuries over the past few days raise the alarm of a possible loss of confidence in US assets, especially considering that China also holds a large proportion of US treasuries and could sell off some of its holdings in retaliation. There is also a chance that other investors will opt for other products as uncertainty in the US rises amid fears of a possible weakening of consumer and business sentiment, and the growing risks of rising inflation and recession loom on the horizon due to the trade war effect.

In coffee, while origins will now be excluded from tariffs for 90 days, consumer prices for coffee remain high and the economic outlook could still affect consumption, especially in the US, adding to the bearish case. In the short term, the macroeconomic scenario is likely to continue to influence prices unless new supply-side fundamentals emerge, such as the risk of frost in Brazil.

Weekly Report — Coffee

Written by Laleska Moda

laleska.moda@hedgepointglobal.com

Reviewed by Carolina França
carolina.franca@hedgepointglobal.com
www.hedgepointglobal.com

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