The editorial board of The Wall Street Journal has recently advised countries around the world to consider reducing their tariffs to zero. This recommendation is especially timely as global trade tensions escalate. These mounting frustrations have led to fear about the slowdown of the U.S. economy. Financial markets are responding with extreme volatility as these events develop. That is certainly the case for U.S. Dollar and bond yields.
Come Wednesday, in the heart of the European trading session, the EUR/USD currency pair ticked within spitting distance of the important 1.1000-level. Such a move could take place just as the U.S. Dollar is starting to modestly bounce this cycle. Traders positioned themselves ahead of the pending release of the Federal Reserve’s minutes from its most recent meeting. The Fed’s hands-off attitude has piled on the market’s jitters about the economic outlook, particularly as the trade war intensifies.
So in the last week or so, U.S. bond yields have spiked— seen below —a sign of nervous investor sentiment that is growing more worried about economic stability. This rise in yields occurs as it seems China is lowering its stock of US treasuries. Some analysts read this move as China’s attempt to increase US borrowing costs. Yet this strategy would only worsen the economic outlook.
Gold prices have been rising as well, approaching the $3,050 level during overnight trading on Thursday. The increase in gold reflects a predictable flight to safety for many investors. They are understandably concerned about the wider economic ramifications of the trade war, including how it might be siphoning off much-needed momentum from U.S. growth.
Unlike in Europe, the Hang Seng Index stole the show with an enormous rebound. After being down as much as 3% earlier in the day, it ended the day in the green. On the flip side, in Europe, Germany’s DAX index was down more than 3%. Most recently, the European Union proposed the same to the United States – a mutual elimination of tariffs on all industrial goods. Even though this bold move will definitely help ease trade tensions, a drop was still suffered.
The broader uncertainties from the global trade war still loom large on U.S. economic prospects. The doubts entering these new advances are evidenced by increased expectations for aggressive monetary easing by the Federal Reserve. Analysts say that the recent US economic slowdown isn’t the only thing driving these expectations. Escalating trade tensions, or the possibility of a trade war, are ranked just behind this concern among investors.
With market participants trying to get in front of the Fed’s upcoming minutes release, that has left a cautious mood permeating the markets. For its part, the Federal Reserve is taking a comparatively calmer line. This change is a positive step and demonstrates that they’ve realized how the current trade tumult could damage national economic development and prosperity.