The past week has been a whirlwind of market-moving activity and events that have spiked volatility, weighed heavily on equity markets, pressured the US dollar, and boosted gold along with other safe-haven assets. Anchoring the past week in terms of scheduled events were central bank decisions from both the Federal Reserve and Bank of England. However, those events were ultimately eclipsed once again by the drama and activity emanating from the White House.

Trade War

The most market-moving event of this past week was clearly President Trump’s announcement and signing of a memorandum on Thursday imposing substantial and wide-ranging tariffs on up to $60 billion of imports from China, in a bid to punish the Chinese for intellectual property infringements. Markets have an extreme aversion to uncertainty, and equities fell sharply as investors worried about the implications of China’s inevitable retaliation. The risk of such retaliation lies is in its potential to make a significantly negative impact on many US businesses, which could dampen overall economic growth. This follows Trump’s announcement early in the month about impending tariffs on steel and aluminum imports (with case-by-case exemptions), which also hit markets severely.

As it turned out, China responded swiftly on Thursday night with threats of retaliation against approximately $3 billion in US exports to the country. At first glance, this appeared to be a rather muted, imbalanced response to Trump’s trade attack. But it should be kept in mind that China is not interested in escalating a trade war any further than necessary, and that the Chinese government is very likely hoping that negotiations with Washington can avert any build-up in trade hostilities. As these negotiations potentially play out, pressure on both equities and the US dollar will likely remain for the time being, and investors may continue to turn to safe-havens like gold, the Japanese yen, and government bonds.

Political Chaos

Other unscheduled political developments include Trump’s Twitter announcement late Thursday announcing that he would be replacing his current National Security Advisor H.R. McMaster with a known foreign policy hawk, John Bolton. Bolton is a nationalist and conservative former ambassador who has previously advocated forced regime change in North Korea and Iran. This high-level White House personnel change is just the latest in a dizzying series of similar changes that have characterized Trump’s administration thus far, which have given investors significant cause for concern.

On Friday, hours before a US government shutdown deadline, Congress passed a spending bill that would keep the government open until September. Though Trump was expected to sign the bill, he tweeted on Friday morning that he was considering vetoing it because it lacked provisions for DACA recipients and it did not fully fund his proposed border wall between the US and Mexico. By Friday afternoon, however, Trump had announced via news conference that he had agreed to sign the bill despite objecting to parts of it, which prompted a tentative sigh of relief from nervous and pressured markets.

Central Bank Decisions

The two major central bank decisions within the past week also impacted equity and currency markets significantly. The Federal Reserve, helmed for the first time by new Fed Chair Jerome Powell, concluded its two-day FOMC meeting on Wednesday, announcing a widely expected 25-basis-point interest rate hike to push the federal funds rate up to 1.50-1.75%. The FOMC statement, economic projections, and subsequent press conference highlighted significantly more optimistic outlooks for GDP and employment, but very little in the way of increases to inflation forecasts in 2018 and beyond. As for the highly anticipated dot plot detailing Fed officials’ latest projections for future interest rates, the median forecast for 2018 remained at three rate hikes (inclusive of Wednesday’s hike). However, the 2019 median rose from 2.5 to 3, and the 2020 median rose from 1.5 to 2. Overall, these higher rate projections coupled with the optimistic statement and press conference struck a moderately hawkish tone, but not nearly as hawkish as might have been expected if the 2018 median had risen to four. Also, the Fed’s softer-than-expected outlook on inflation pressures detracted significantly from what could have been a much more hawkish statement. The US dollar fell sharply after release of the statement and press conference, while equities whipsawed indecisively.

On Thursday, the Bank of England kept its bank rate steady as expected at 0.50%, but it delivered a hawkish-leaning statement leading markets to believe that an impending rate hike, possibly in May, would be likely. Unexpectedly, two members of the central bank’s monetary policy committee voted for a rate hike when none were previously expected to do so. This initially resulted in a sharp spike for the pound before the currency pared its gains and pulled back modestly.

The Week Ahead: Trade War Concerns Still in Focus

In a comparatively light pre-holiday week ahead in terms of economic data and events, political concerns and trade war fears should continue to take center stage for both currency markets and equity investors. Any further escalation of the trade conflict between the US and China could place renewed pressure on both stocks and the dollar, whereas any dissipation of tension due to negotiations could prompt relief rallies. Key scheduled economic releases include: US Consumer Confidence on Tuesday; US Final GDP (Q/Q) on Wednesday; and UK Current Account, UK Final GDP (Q/Q), and Canada GDP (M/M) all on Thursday.

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