Political risk remains key moving into what looks to be a quiet week on financial markets. How the issue of US trade tariffs continues to develop over the coming days will be key for sentiment. Will protectionist fears subside or proliferate? We look at the outlook for financial markets and impact on forex, equity indices and commodities.
Markets are being hit as risk appetite has dramatically deteriorated. The growing prospect of trade protectionism between the world’s two most powerful economies is increasingly of major concern to investors. The big question in the coming weeks is how China will react to Donald Trump specifically targeting then with $50bn to $60bn of trade tariffs. China has already said that it does not fear a trade war with the US but is yet to respond to the targeted tariffs. It is estimated that US tariffs would negatively impact the Chinese economy by around a quarter of a percent of GDP growth. So not anything too serious seemingly. However Trump could go further as he looks to reverse a $375bn US/China trade deficit. The strength of the response in the coming weeks could play a key role in the development of risk appetite. However, investors are also concerned by the increasingly hawkish re-composition of Donald Trump’s administration. New national security advisor John Bolton is a hawk advocating a more aggressive stance on North Korea and Iran, and comes hot on the heels of the resignation of the moderate Gary Cohn who was a balancing force as Trump’s economic advisor. However, another factor to consider in the coming weeks is that short term funding rates for companies around the world are rising as the US three month US dollar Libor rates have rise to their highest since 2008. This tightens financial conditions further and negatively impacts risk appetite.
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