President Donald Trump's decision to slap tariffs on $60 billion worth of Chinese imports and that country's retaliation with levies of its own has slammed into financial market sentiment, pummeling equities lower and sparking concern about this trade war's impact on economic growth.
The nervous mood has been further exacerbated by news of yet another White House dismissal which saw Trump replacing his national security adviser, HR McMaster, with John Bolton – who is, says Saxo head of forex strategy John J Hardy, "a noted hawk who made very strong statements about Iran just two days ago".
But for all that, forex markets are remarkably quiet, Hardy says, with the only noteworthy move being a slight advance by the Japanese yen, the usual beneficiary of risk-off flows. On the other hand, Saxo's Global Risk Index reflects the these latest Trump shocks very graphically [chart below] and is heading back lower, Hardy says.
But equities are taking the brunt of the hit with Asia suffering very steep falls overnight and the rot now spreading to the European open. "We're now down at levels in the S&P 500 where it's getting uncomfortable and if we break below 2,600 then potentially we have a completely new scenario," says Peter Garnry, Saxo's head of equity strategy. "Our stance is to remain cautious and defensive – be careful out there and keep stops tight," he adds.
The trade war is also having an impact on commodities, says Ole Hansen, Saxo's head of commodity strategy: "Commodities depend on primarily one thing and that's global growth because this is what sparks demand." Fears about a fallback in economic growth are most immediately felt in industrial metals while precious metals benefit from their safe-haven status.
Oil is another beneficiary as the possibility of new US sanctions on Iran has sent crude bolting into a technical breakout rally. "Rising global trade tensions risks are impacting global growth and demand but for now the expected renewal of US sanctions against Iran is the main theme influencing the market," Hansen says.
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.