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.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist