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Markets pare recent losses but remain vulnerable

Markets are taking a breather on Thursday, with US futures paring recent declines although traders remain very concerned about recent trade war developments.

The recent declines we’ve seen in equity markets will no doubt be a concern for investors, worried about the prospects for the global economy when tensions between the world’s two largest economies are becoming heightened. The latest reports relating to Chinese threats on rare earth minerals represent another potential escalation in the crisis and highlight how technical the threats will now become as we move on from tariffs alone.

The Trump administration must be concerned about the toll this is taking on the markets. The sell-off we’ve seen this month may not be too extreme – just shy of 6% at the close yesterday – but as we saw in the fourth quarter of last year, it could get much worse. The impact recent events are having on the yield curve both highlights the risks investors associate with events and further feed into the doom loop as investors become increasingly wary about the risk of a recession.

Gold looking soft but could still be a bullish case

The dollar is once again being favoured during the escalation of the trade spat, as yields on US Treasuries continue to head lower. Whether this is a sign of Treasuries being the preferred safe haven during the stock market sell-off or a belief that the US will be least worse off, it’s very much consistent with what we’ve seen previously.

What’s more, it’s making life tough for the other traditional safe haven, gold. While the yellow metal typically performs well during periods of risk aversion, it also responds strongly to movements in the greenback and is therefore being dragged lower recently by movements in the currency. Gold is trading back below $1,280 today putting the focus back around the $1,265 lows of the last couple of months. One bullish case for gold at the moment is that it performed well during the fourth quarter after a stuttered start, perhaps that’s what we’re seeing now.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

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