Risk assets have been perked up somewhat on signs of progress between the US and China on the trade front. US stock indices had tumbled on Tuesday on lack of good news regarding tariffs, not helped by Trump’s comments about the US not needing to sign any trade deals. But with US and Chinese officials now due to meet in Switzerland this week, a window of opportunity has opened up for the world’s two largest economies to perhaps move away from the current scenario of imposing triple-digit tariffs on each other (with the US imposing 145% tariffs on China, and China imposing 125% tariffs on the US, with some exceptions). As such, traders will be highly attuned to any further defrosting of trade tensions between the economic giants, with risk assets standing to benefit if lower tariffs look to be on the horizon.
Aside from the US-China talks, the other headline act this week is the Fed meeting. While no rate change is expected this month, investors will be looking for clues from the US central bank about a potential lowering of interest rates in June. However, with the latest US jobs figures showing resilience (after Friday’s non-farm payrolls figures beat expectations for the month of April), there is less urgency for the Fed to adopt a more dovish tone and even a June rate cut is looking increasingly like an outside possibility.
Essentially, markets will be assessing the tone of Fed Chairman Powell to gauge how many rate cuts could be in the pipeline in the second half of the year. But I expect that Jerome Powell (much like the rest of the financial market) will be waiting to see how the tariff story plays out over coming months before being able to determine the economic consequences. There are still a lot of things up in the air, such as the question of how many trade deals could the US sign during the current 90-day tariff pause, and with whom. This is a crucial factor in determining the GDP impact on the US and global economy. So, with many tariff questions remaining unanswered at this point, Powell will likely preach a message of economic uncertainty which could leave investors guessing about the extent of rate cuts the Fed may deliver in 2025.
Gold has taken a run higher this week, courtesy of Trump’s threats of pharmaceutical tariffs and escalating geopolitical tensions between India and Pakistan. The resulting pick-up in safe haven demand saw gold break through resistance at $3350 and make a push back above $3400. However, headlines about the impending US-China talks took the edge off the gold price to a degree with the precious metal dipping back below $3400 (as of the Asian morning session on Wednesday). Support arrives at $3351 (former resistance level now turned support), and again at $3295. Resistance awaits at $3450 and $3485. Longer term, the bullish picture remains intact for gold however the precious metal could be subject to setbacks in the near term if trade-deal progress causes safe-haven demand to recede.
Oil market volatility has been on the rise this week. Firstly, crude dropped sharply to start the week following OPEC+’s decision to ramp-up production once again next month. However geopolitical tensions and slightly softer USD have allowed the oil price to rebound from its weekly lows. After trading down near $55, the WTI (US crude) contract has been making its way back towards the $60 level. Last seen at $59.27 early on Wednesday, resistance is at $60 ahead of $61.17, with support at $57.37. In the near term, any further trade deal optimism could help oil from a demand perspective, though higher supply stemming from OPEC+’s production increases could cap the upside potential.
Apart from the US FOMC meeting, the economic calendar looks quite light for the rest of the week. We do get a Bank of England rate decision on Thursday (where a 25bp cut is expected), while Chinese inflation data is scheduled for release on the weekend. But I expect that tariff developments (or lack of) will continue to be the driving force behind stocks, commodities, and currency markets.
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