The markets will kick off the shortened trading week following the Labor Day Holiday with all eyes again turned to the ongoing U.S./China trade war and the latest developments in the Brexit saga.
Over the weekend, 15 percent tariffs went into effect on about $110 billion of Chinese goods in the latest escalation in the war on trade. Although China has not implemented further retaliatory tariffs-at least not yet-the move is seen as just the latest step in the feud that could potentially see additional, significant tariffs put into place.
The trade war was a very influential theme for markets in August and was the primary catalyst behind rising volatility and some sharp sell-offs. Now that summer is winding down, stocks could have even more problems ahead. Since 1950, September has been the weakest month for stocks, seeing an average decline of about .5 percent. Any further action taken by the U.S. or China is likely to fuel risk aversion and lower equity prices.
Some analysts have suggested that thus far the war on trade has not had a significant impact on the economy. The latest round of tariffs may hit consumers directly, however, as rising prices may be unavoidable.
Any fresh news on the trade war front has the potential to move markets, but it won’t be the only major area of concern for investors this week. The latest Brexit news could also have significant, global implications and will be closely watched by world markets. As the latest Brexit deadline of October 31st rapidly approaches, lawmakers return from summer recess today and will have the opportunity to prevent a “no-deal” Brexit. Prime Minister Boris Johnson has threatened to call another snap election for October 14th, however, if any efforts are made to block a “no-deal” Brexit. The ongoing uncertainty surrounding the situation has caused the pound to tumble, and the currency recently hit a fresh 34-year low against the dollar.
The civil unrest in Hong Kong may also continue to be a source of anxiety for global markets. Protestors recently blocked roads near the airport-one of Asia’s largest-and some flights had to be cancelled. Train and bus service to the airport had to be suspended from the outlying island of Chek Lap Kok and some travelers were forced to walk to the airport. Protestors even attacked a nearby train station. The arrival of busloads of riot police eventually caused the protestors to disperse, but the situation is quickly getting far more serious and dangerous. The question now appears to be whether China will step in to quell the unrest, and if so, how it may plan to do so.
The current economic and geopolitical landscape is fraught with danger that may keep a high level of risk aversion in the marketplace. As traders return from summer vacations, markets will likely be driven primarily by headline risk and any further data that points to a significant economic slowdown.
Against the current geopolitical backdrop, the gold market will likely stay on the offensive and a challenge of resistance at the $1600 region could be seen in short order. As the market builds a higher base, significant support may be seen at the $1500 level and any dips are likely to be aggressively bought.