Just under 24-hours from the first Fed rate cut in over a decade and President Trump rattled markets with a surprise announcement of a new “small additional tariff of 10% on the remaining $300 billion of goods and products”.
The bond market was already calling for lower yields and Trump’s tariff tweet accelerated the move. Financial markets remain so uncertain over monetary and political policies and it seems most asset classes are selling off and could see further pressure. The risks for trade talks blowing has now become the base case for many. China’s response is eagerly awaited and we will likely see agricultural purchases disappear, the rare earth threat will return and we could see life get harder for American companies in China.
Regarding the Fed, expectations for a rate cut jumped from around 60% for a September rate cut to 96.8%. The Fed’s concerns on trade were likely confirmed today and we will see an the mid-cycle adjustment become an easing cycle.
The trade war escalation is killing oil prices and falling demand concerns will accelerate in the coming weeks. We are unlikely to see any positive news from the Chinese, so risk aversion is likely to keep the pressure on. Crude prices could see bearish momentum remain after breaking below critical support levels.
Gold was the easy trade for many. The bullish move took some time to generate, but World War Trade is going to keep safe-havens in demand for quite some time. The Fed is going to cut not for inflation but possibly on the collapse of trade talks.
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