Although Monday will be a slow day in terms of economic data, financial markets will have plenty to digest the rest of the week. Investors will get the latest readings on Retail Sales, Empire State Manufacturing, Industrial Production, Housing Starts, Weekly Jobless Claims and more. There will also be several Fed officials speaking this week at various engagements, including James Bullard, Neel Kashkari and Lael Brainard.
Investors may, however, be most concerned with U.S./China trade negotiations that are set to begin on Tuesday. In addition, the U.S. could reach a decision on the NAFTA Agreement with Mexico this week.
The issue of global trade has been, and will likely continue to be at, the center of the marketplace’s attention. It was not long ago that the notion of a full-blown global trade war roiled financial markets, sending volatility to the highest levels seen in some time. Although markets have been calmer since, any hawkish rhetoric on trade still has the potential to set investors into panic mode, fueling higher volatility and selling across risk assets.
The gold market has largely held its ground recently even as stocks once again show signs of renewed strength. The stock market may, however, be considerably more fragile at this point. Like a house of cards, stocks and risk assets could come toppling down quickly on any number of potentially bearish influences. Increasing tensions over trade, rising inflationary pressures and upcoming midterm elections could all potentially fuel volatility, causing investors to seek out alternative asset classes.
Stocks may be heading right into some serious headwinds, and once things start to go south, gold and other perceived safe haven assets could see significant inflows.
Investors will also continue to watch the dollar this week, which recently traded at a 4.5 month high. The greenback has seen a good bounce in recent weeks, taking some of the wind out of gold’s sails in the process. The idea of a significant and sustained rally in the greenback, however, is not likely to happen. A cautious Fed, higher deficits and ongoing geopolitical turmoil may all work against the dollar, keeping any sizable rallies at bay.
The greenback has been a major driver of price action in gold and other hard assets in recent months, and will likely continue to exert a heavy influence on gold and other dollar-denominated commodities. That being said, if or when the dollar does turn down once again, the bears could have enough to push prices to multi-year lows. Such a move could potentially send gold prices back towards previous all-time highs.
Finally, in addition to stocks and the dollar, the crude oil market is also worth watching. Prices have traded above the $70 per barrel level for the first time in years, and have continued to show strength. With Venezuelan output declining, the U.S. pulling out of the Iran Nuclear Deal and a June OPEC meeting on the horizon, prices could remain steady to higher. Stronger crude prices are inflationary, and if prices continue their recent ascent other commodity prices are likely to move higher as well.