Markets begin the new trading week still dealing with the fallout of the latest escalation by Donald Trump of the trade dispute between the US and China . We consider the implications for the outlook on forex, equities and commodities markets.
Although markets are taking more of a settled outlook after a tumultuous past week, as the dust settles, there are some key standout themes. The Fed cut rates but disappointed the market, but pricing continues to suggest that the Fed will have to go further in its cuts. The Fed may be data dependent (according to the FOMC statement) but that was before Donald Trump has subsequently announced tariff increases on China. The tariffs could perpetuate the global slowdown which the US is not immune. PMIs are dropping to show a US deceleration but also inflation expectations will be hit (look at the ISM Manufacturing Prices Paid index plummeting). S economy – see the downward which continues to push for further rate cuts. The market believe that Fed has got it wrong. Although the dollar spiked higher on the Fed, this move is likely to struggle for traction. We favour the safe haven plays in these markets. Yield differentials should help the yen and Swiss franc to perform well. Rates already at rock bottom levels can only see differentials squeezed (especially with the Aussie and Kiwi). However, this should also pull negatively on the likes of Euro/Yen, Euro/Swiss and Dollar/Yen. We also favour the outlook for gold. Real yields are falling and with the continued concerns for the escalation of the tariffs dispute, the outlook for gold remains favourable. Furthermore, the outlook for higher risk assets such as equities also looks worrying. Fed rate cuts may sound good for equities, but in an environment of worsening economic outlook, it should be the bears who will prevail.