Market continues to monitor the development of trade conflict between the U.S. and China
1. Mitigation of US and Chinese rhetoric
2. Dollar recovers its positions
3. The political crisis in the UK is growing
4. Oil is growing against the backdrop of the deteriorating situation in the Middle East
The topic of trade relations between the U.S. and China remained in the investors’ focus of attention throughout the trading week. On Monday, official Washington and Beijing exchanged threats to increase import duties on each other, exerting significant pressure on major stock indices. American Nasdaq showed the strongest intraday decline since the beginning of this year. But on Tuesday, both the White House and Chinese authorities changed their anger to mercy, noting that they are still interested in de-escalation of the conflict and continuation of trade negotiations. These statements gave a good bullish impulse to the major stock indices and significantly weakened investors' interest in protective assets such as gold, Japanese yen and Swiss franc, which remained under pressure throughout the week.
The foreign exchange market is once again showing a trend towards strengthening of the US currency, although in the middle of the week the US dollar may have gotten under a fairly strong pressure after the publication of weak data on retail sales in the US. Unexpectedly for many investors the data turned out to be much worse than the forecasted values, against which the Atlanta Federal Reserve revised its forecast on the growth rates of the U.S. GDP for the 2nd quarter from 1.6% to 1.1%. Positive statistical reports published on Thursday, as well as weakening of other G7 currencies, helped to save the situation, which contributed to the growth of the dollar index.
The strongest bullish impulse for the dollar index was the weakening of the European and British currencies, which were under strong pressure in the second half of the week. Pressure was exerted by the resignation of Theresa May's government. Earlier May repeatedly stated that she intends to resign after the ratification of the agreement on the UK's exit from the EU, but, against the background of failures in negotiations with Labour and pressure from fellow party members, on Thursday May announced that she will resign after another vote in Parliament, scheduled for early June. May will resign, however, regardless of the outcome of the vote.
Almost immediately thereafter, Labour announced the virtual cessation of inter-party negotiations with the on-the-verge-of-collapse government, which means another failure of May's plan in the parliamentary vote and further aggravation of the political crisis in the country. At the same time, many investors are afraid that May may be replaced by conservatives who may nominate a candidate to support a rigid Brexit scenario, which may entail serious economic losses for both the UK and the European Union.
Against this background, by Friday the pair GBP/USD fell to its lowest level since mid-January this year and may continue to decline to new multi-month lows.
The European currency also trades with a decline and gradually loses its position to the dollar.
The pair USD/JPY was traded at the level of the trading week opening for almost the entire five-day period. The dollar and major stock indices growth stopped a strong bearish trend, which we observed a week earlier.
Precious metals market
Gold demonstrated very volatile trading during the week, against the background of the situation in the world trade. On Monday, gold quotations grew by more than 1% after mutual threats of the USA and China. On Tuesday, the situation changed dramatically. Both sides showed a desire for de-escalation of the conflict as a result of which the demand for protective assets began to decline sharply and gold returned to the opening levels of the trading week. Significant pressure on the price was also put by the U.S. dollar, which significantly strengthened its market position in the second half of the week.
The oil market was mainly forming an ascending vector of movement after a slight decrease in quotations on Monday. The growth driver was the Middle East situation escalation. On Sunday an armed attack on two Saudi oil tankers was reported, and on Monday Saudi Arabia reported a drone strike on one of the oil pipelines, which was closed for security purposes. Riyadh and Washington accused Iran of these attacks, sanctions against which were tightened by the United States in early May. Investors fear that further escalation of conflict in the region could lead to significant disruptions in energy supplies to world markets.
The stock markets demonstrated rather volatile trading during the week in a strong reaction to the news related to the world trade. On Monday, the U.S. indices showed the strongest intraday decline since the beginning of the year, after the aggravation of trade contradictions between the U.S. and China. On Tuesday, the market turned around by 180° reacting to the rhetoric softening on both sides. As a result, during the week the main indices managed to recover the losses incurred on Monday.