Fresh tariffs from the Trump administration has put a global trade war right at the centre of market psyche. Risk sentiment collapsed sending European and US tech stocks significantly lower. Investors are preparing for the worst, namely a tit-for-tat reaction from China and the negative consequences it could have for the free flow of goods and services. A trade war damages the idea of synchronized global growth in 2018. That was central to the bullish thesis for markets this year.
Although the US is the initiator of the protectionist policies that have investors worried, they have been seeking the safety of the US dollar. That comes after a soft reaction to the decision to raise US rates. The dollar has some room for recovery, even if Jay Powell isn’t striking a new hawkish tone for Fed policy. The risks of a trade war are skewed toward Asia and Europe, rather than the US, making an oversold US dollar more attractive.
The jump in the British pound in reaction to two MPC members of the Bank of England voting for a rate rise was short-lived. A May rate hike looks very much one the table but sterling bulls had run out of gas. Enthusiasm over the agreement of a Brexit transition period, which had already sent the pound soaring this week, raised the bar for the Bank of England to add to the gains. The FTSE 100 now sits on the precipice of the lows it reached during February’s market correction.