The global trade war appears to be officially under way. Over the weekend, China implemented tariffs of up to 25% on 128 different U.S. products, including pork, fruit, nuts and wine. China is without a doubt taking recent actions by the Trump administration very seriously, and in a quick retaliatory move has hiked tariffs on key imports.
The situation could escalate further, and it already has global investors on edge. Much of the recent market volatility can be attributed to the potential for a significant war in global trade, and any further actions by either side may rock equity markets even further.
The benchmark Dow Jones Industrial Average snapped a nine quarter win streak, and some analysts are putting the blame on rising volatility. Wall Street’s fear index, known as the “VIX,” surged some 85%, the largest rise since 2011. There could be a number of potential reasons for heightened fear in the marketplace, including the potential for a trade war, ongoing geopolitical issues, the potential for higher rates and inflation.
Whatever the major catalyst might be, investors seem to be taking a much more cautionary tone when it comes to equities. Although this does not necessarily mean that stocks will go lower, it does mean that many investors see reason to worry. That, in turn, could act as lighter fluid on any stock market sell-offs, quickly turning a normal pullback into a much larger-scale downturn.
The trade spat with China comes at a time when the dollar continues to struggle finding any upside momentum. Although the dollar index has recently halted the slide lower, the greenback does remain vulnerable to selling that could see the currency embark on a fresh and significant leg lower in value. The longer the index trades under the 90 level, the more likely another move lower may be seen.
Investors will be watching both the geopolitical landscape and the data stream closely in the weeks and months ahead. As it stands, the Fed has penciled in another couple rate hikes this year, but that could change based on inflation expectations or other issues. The central bank has alluded to the possibility of a fourth hike, or even making a 50 basis point jump at one of its upcoming meetings.
Further signs of economic strength may give the central bank reason to become more aggressive as it looks to normalize monetary policy. Strong data could, therefore, weigh on equities and risk assets. Weaker data, on the other hand, may keep the Fed at bay, which could fuel further fears of inflation accelerating and the central bank falling behind the curve.
Either scenario could potentially be considered bullish for gold. The heightened stock volatility risk, geopolitical issues and rising inflation against an improving technical backdrop may keep the yellow metal on the offensive in the weeks and months ahead. In addition, stocks could be in the early stages of a long-term top, as increasing worries over valuations may fuel further selling. An increasing number of investors may look to take profits in stocks, and a significant asset rotation could get started, fueling fresh buying in alternative asset classes.