Markets appear headed for some more volatility this week as fears over global trade take a toll on sentiment. Stocks are set to begin the new trading week on a sour note, while interest rates are moving slightly lower in early action. The dollar index is once again moving higher, and strength in the currency is taking a toll on hard assets.

 

Of particular note for investors is gold’s lack of strength given the ongoing uncertainty over global trade. Indeed, the metal often acts as a safe haven asset-attracting buyers during periods of economic or geopolitical turmoil. This tendency has not be seen in recent months, however. The lack of any strength in the metal seems to be puzzling both traders and investors, but given some of the major headwinds being faced by the market it is really not that surprising.

 

Interest rate expectations have had a powerful effect on the dollar, and the Fed appears to be staying on course with further, yet gradual rate hikes. Although just how many hikes remains the subject of some debate, the Fed Funds rate is likely to keep creeping higher in the months ahead. That being said, however, it is possible that the key rate could top out around the 3 percent area before the central bank is forced to bring it back down to combat the next recession. For now, the notion of higher rates continues to boost the dollar.

 

The dollar has been a major weight on gold prices and appears headed even higher. Although the negative correlation between gold and the dollar has softened a bit in recent weeks, the stronger greenback still appears to be a major obstacle to higher prices. The recent weakening of the negative correlation would seemingly point to some other supply and demand factors also playing a role, and summer is often a slow period for Asian buying in the metal.

 

Another primary hurdle for a significant rally could be concerns over China’s economy. China is a major buyer of metals, and worries over its economy weakening have likely played a major part in the tanking of industrial metals. Copper, for example, is down some 8 percent so far this year. The drag on industrial metals may also be affecting the gold market, and the yellow metal may have simply got caught up in the bearish sentiment.

 

Adding to the market’s woes is the fact that the technical picture for gold has deteriorated significantly. With a major crossover of key moving averages, the market could be in the beginning stages of a longer-term downtrend. This could lead short-term traders to sell into any rallies, and may keep long-term buyers waiting on the sidelines in anticipation of even lower prices.

 

 

The market may indeed need to see further declines before finding more stable ground. On the other hand, a significant escalation in the war over trade or a sharp decline in stocks could potentially spark interest in the metal. That being said, however, the metal has a lot of work to do to neutralize its weakening technical posture.

Stocks are not getting the new trading week off on the right foot, as concerns over the potential for a global trade war have once again resurfaced in a big way. On Friday, U.S. President Donald Trump announced tariffs on $50 billion of Chinese imports. In response, China said it would target high-value U.S. exports.

 

This tit-for-tat surrounding trade is seemingly putting the world’s two largest economies on a collision course that could result in an all-out trade war. Such a scenario could have significant consequences for the global economy and financial markets, and increasing tensions over trade could not come at a worse time.

 

China’s economy had gotten off to a solid start in 2018, and in many ways has acted as a buffer for global growth. The Chinese economy has, however, been showing some signs of slowing in recent data. Rising tensions over trade may exacerbate this slowdown, which policy-makers may be less likely to combat with previously seen stimulus measures. The result could potentially be a couple of pints shaved from each nation’s GDP this year and next. Perhaps more importantly, however, the uncertainty surrounding trade could damage investor and business confidence, slowing cross-border investment in the process.

 

Gold is trading not far from its lowest settlement of the year, and has remained range-bound for some time now. The metal’s lack of upside comes at a time when seemingly more and more analysts are sounding the alarm bells over increasingly high stock valuations, especially in high-flying tech names. Although stocks have shown a great deal of resiliency in recent months, investors have to be wondering just how much upside could be left in the tank.

 

Increasing economic and geopolitical headwinds are likely to become an increasingly significant factor in global financial markets in the weeks and months ahead. Accelerating inflation, trade tensions, higher oil and rising risks of recession may all weigh on economic activity and fuel and eventual reversal in global stocks and risk assets. Add to this the potential for a further and perhaps significant shakeup in the EU, and you have a recipe for trouble.  You could make the argument that the risk/reward in stocks currently is not favorable, and now may be the time to consider diversifying away from equities.

 

Whether it comes next week, next month or next year, the next major stock market collapse could wipe out billions in shareholder value. Just as it did in the tech bubble of the early 2000s, and even during the financial crisis of 2008/2009, the onslaught could catch many unknowing investors off-guard, causing them significant declines in wealth that could take years, possibly even decades to recoup.

 

A great asset rotation could be seen in the months ahead. As investors become more skeptical over global growth and the geopolitical landscape, asset classes that have lagged could potentially outperform. Gold could stand to benefit greatly from such a scenario, and the next major, cyclical bull market in the metal may very well get started.

The gold market may simply be in a period of treading water until the next Fed meeting later this month. The market has shown a tendency to remain subdued or even lower ahead of such announcements on monetary policy, and then rallying once the decision on rates has been made public.

 

The markets are pricing in a June rate hike from the central bank, with the next hike likely not coming until October or November. The Fed has also alluded to the fact that it may already be close to a rate level that is neither overly expansionary nor overly aggressive. Although the current rate cycle is not likely to see rates get anywhere near levels seen in previous tightening cycles, rates could potentially end up staying at levels that are even lower than expected. In other words, it appears that the era of low rates may not be over, but may be likely to continue for some time. Such a scenario could potentially be highly bullish for gold and other hard assets.

 

Investors continue to cheer on last week’s non-farm payrolls data which showed the U.S. added a solid 223,000 jobs in May. Current enthusiasm may be tempered quickly, however, if geopolitical tensions deteriorate further.

 

Risk appetite remains strong currently in spite of several negative influences. Stock investors have thus far been able to shrug off recent developments in Italy as well as new developments in global trade. Both could be a serious cause for concern and could potentially rattle global financial markets.

 

Italy was unable to form a new government, and will now hold elections later in the year. The nation’s anti-establishment parties seem to be gaining further traction, and if elected could push for the nation to withdraw from the EU. Needless to say, as one of the region’s largest economies-and the largest debtor nation-an Italian exit from the union could have widespread and significant implications for global financial markets. Investors are likely to keep this in mind over the next few months, as a flare-up in tensions could send capital pouring into perceived safe haven assets.

 

Recent tariffs imposed by U.S. President Donald Trump are also making waves. The U.S. last week announced it would impose a stiff 25% tariff on imported steel from Canada, Mexico and the EU. It would also impose a 10% tariff on imported aluminum.

 

The administration used a little-known law that permits the use of tariffs to counter a national security threat. Canadian Prime Minister Justin Trudeau called the move “insulting and unacceptable.” Canada has responded by imposing tariffs of its own on a variety of goods, and the confrontation could hurt consumers on both sides of the border.

 

The move also drew criticism from French President Emmanuel Macron, who reportedly stated “economic nationalism leads to war.”

 

Any further escalation in the war on trade could send shockwaves through global markets. With the U.S. apparently ready to take a hardline approach, investors may become increasingly cautious and demand for perceived safe havens asset classes may see some sharp gains in the weeks and months ahead.

 

Investors continue to cheer on last week’s non-farm payrolls data which showed the U.S. added a solid 223,000 jobs in May. Current enthusiasm may be tempered quickly, however, if geopolitical tensions deteriorate further.

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.