Aggressive protectionist policy of the USA remains the main driver of movement in financial markets
China is preparing a response
Trump introduces duties on imports from Mexico
In Great Britain, the race for the premiere minister chair has begun
Oil market continues to fall
The situation in the world trade still remains a key factor determining the mood and behavior of investors in financial markets. A new round of trading tension once more caused panic in the stock market, which ended the trading week in the red zone. Another wave of sell-offs was triggered by media reports of possible Chinese retaliation in the form of restrictions on exports of rare metals from the U.S., Trump's announcement of increased duties on Mexican goods, due to the inaction of the authorities to solve the migration problem, and another portion of weak statistics from China, which indicates a slowdown in economic activity in the production sector.
Investors fear further escalation of the conflict, which will inevitably lead to deterioration of the economic situation in the global economy. Traditionally, the main beneficiaries of increasing geopolitical risks are the protective assets - gold and yen.
The currency market had a relatively calm trading week. There were no important economic news that could cause significant price fluctuations in the market. Monday was a day off in the U.S., and the European markets reacted rather sluggishly to the outcome of the last European Parliament elections.
During the first half of the week the EUR/USD currency pair was traded in the red zone against the dollar strengthening background, but the decrease in quotations was insignificant and the buyers were able to win back most of these losses during Friday's trading session. The pressure on the U.S. currency was put by the White House's new announcement of the introduction of duties on Mexican goods. Investors fear that Trump’s further aggressive protectionist policy will have a negative impact on the U.S. economy, which may cause the response of the Fed in the form of monetary policy easing.
The British pound sterling is still in a rather heavy knock-down amid growing uncertainty around Brexit. After the announcement of May's imminent resignation, the country is in a serious struggle for the prime minister's office. Among the main contenders is former Foreign Minister Boris Johnson, who is facing a lawsuit for knowingly spreading false information in the run-up to the Brexit vote in 2016, for which he faces a theoretical penalty of up to life imprisonment. Investors fear that the rise of more radical conservatives may lead to uncontrolled Brexit, with very strong negative consequences not only for the UK economy, but also for the EU. The situation is unlikely to change in the near future, so in the medium term the pound will remain under strong pressure.
The Japanese yen gained a lot of strength at the end of the trading week and the USD/JPY pair renewed its four-month low. High demand for Japanese currency is still connected with the tense situation in stock markets and the investors avoiding risks.
Market of precious metals.
The week turned out to be very difficult for gold. Till Thursday yellow metal was traded in the red zone, oagainst the background of increasing pressure from the dollar and the stock exchanges being quiet. The situation began to change sharply in the second half of the week, with the aggravation of trade conflicts. Reports of possible restrictions on U.S. exports of rare-earth metals by China and Trump's statements about the introduction of duties on Mexican goods caused panic in the stock market, which is traditionally accompanied by increased demand for risk-free assets, including gold.
The oil market was held hostage to geopolitical intrigues and traded mainly in the red zone. The weekly decline in Brent was more than 6% (a week earlier -8.7%), and in WTI - more than 4% (a week earlier -9.3%). Oil is a traditionally risky asset, so investors are increasing aggressive sales amid rising geopolitical uncertainty. Also, a new round of aggravation of the situation in the world trade creates a threat of reducing the level of demand for energy carriers. As a result, oil closes the week with more than three months' worth of new lows.
The stock market ended the week on a minor note. The main driver of market decline was Trump's threats against Mexico and China's possible response to the U.S. protectionist policies mentioned above. Investors are increasingly worried about the global economy, which makes them rush to adjust their investment portfolios, increasing the share of more reliable assets that will help to preserve the value of capital.