Uncertainties in the global economy and financial markets are seen rising, buy safe assets such as gold?
Trump’s trade proposal and Powell’s testimony add large uncertainties in both global economy and financial market this year
President Trump’s trade proposal, as well as comments from new Federal Reserve Chairman Jerome Powell earlier last week, adds on to an investment landscape already characterised by fears about inflation and tighter monetary policy. These jitters have pressured both stock and bond markets as investors are worried that a prolonged policy of low short-term interest rates and accommodative central banks could be upended more quickly than expected. However, FX trading activities increased last week, as more volatilities provided more opportunities to the currency traders to enter and exit the trades quickly.
The threat of a trade war spurred turmoil in the financial markets around the world as investors scrambled to assess a potential disruption to a rare period of synchronised global growth. The US stocks had a sell-off last Thursday, after Trump tweeted, pledging to impose stiff tariffs on steel and aluminium imports. His plan sent overseas stocks tumbling and was met with warnings of retaliation across Asia, Europe and even in North America. Some US companies such as metals producers may benefit from the new tariffs as some of their stocks’ prices rallied after the news. Their customers, on the other hand, including car makers and construction companies, may be faced with higher purchases costs, which may be passed down to consumers. Some export-oriented US companies also warned of the risks of such measures that could hurt their sales outlook as their share prices fell. Such results are not favoured by many investors because Fed’s pace on normalising its policy rates would be even faster.
Before Trump pledged on the tax plan, market volatility has been rising after the new Fed chairman’s testimony. Jerome Powell offered an upbeat view on the economy over two days of testimony on Capitol Hill last week. On Tuesday, stocks and bonds sold off after Powell told a House panel his own economic outlook had improved, leaving the impression that he could lead Fed officials to slightly increase the pace of rate increases this year just when the agency raised the rates by three times last year. In other words, he opened the door to four interest rate increases this year, while Fed officials in December 2017 projected three rate increases this year.
Powell also mentioned that US economy’s prospects have brightened since December, with unemployment rate at a 17-year low of 4.1%. Trump and GOP in recent months enacted tax cuts of at least $1.5 trillion over the course of 10 years and spending increment worth $300 billion for the next two years that will swell federal budget deficits. These measures could boost household and business spending and pushed inflation up as well.
Our Picks
EUR/USD – Slightly bullish.
Members of Germany’s Social Democratic Party voted to join Chancellor Angela Merkel’s next government, restoring a sense of political stability in Europe’s largest economy. This positive news could push EUR/USD towards 1.2365 this week.
AUD/USD – Slightly bearish.
China seemed unwilling to spend in infrastructure as huge as last year, and its fiscal deficit to GDP ratio target is lowered according to NPC meeting recently. The information of a less pro-growth measures in China may pressure AUD/USD towards 0.7675.
XAU/USD (Gold) – Slightly bullish.
Some risk off in the region seen as stocks are selling off after Trump’s trade proposal. This may also spur demands on gold. We expect price to rise towards 1340 this week.
Fullerton Markets Research Team
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