Global equity benchmarks are ripping back this morning as trade tensions have found a way into the back seat of investors’ minds. In fact, the small-cap and domestically focused Russell 2000 notched a record high on Monday, matched it yesterday and extended such gains in today’s session.
Risk-off sentiment is sweeping through global markets after U.S. President Trump fired back at China last night. He instructed the U.S trade representative to identify $200 billion worth of Chinese goods to impose a 10% tariff. Crude oil recovered very well yesterday as speculation mounted that OPEC will only raise production 300,000 to 600,000 bpd. However, this morning, crude oil is a casualty of the risk-off, trade war fears.
Although the European Central Bank is widely expected to keep monetary policy unchanged in June, investors are likely to be more concerned with the latest economic growth and inflation forecasts. Expectations remain somewhat elevated over the ECB potentially signaling an end to (quantitive easing) QE at the meeting. While hawkish comments from ECB officials and accelerating inflation have fuelled speculation over QE coming to an end, this could be a classic case where markets may be setting themselves up for disappointment.
Fundamentals: The Federal Reserve hiked interest rates by a quarter point yesterday and signaled that two more hikes are on the way this year. The Fed’s statement was overhauled and pointed to stronger growth and spending. However, they did maintain their “symmetric 2% inflation objective”. This arguably relieved some thoughts that the Fed would allow themselves to move faster than a gradual pace if inflation picked up.
Crude oil prices are trying to stabilize as the market is reeling from the seasonal peak in the gasoline switchover, a potential rise in OPEC and Non-OPEC production and sanctions on China. Tough talk on NAFTA negotiations as well as a created political crisis in Italy.
The U.S. dollar had massive weekly gains against all majors. The release of the gross domestic product for the first quarter of 2018 beat expectations but did little for a dollar that had rallied all week. Dovish central bank rhetoric from the European Central Bank and the Bank of Japan have increased the anticipation for the U.S. Federal Reserve’s Federal Open Market Committee on Wednesday, May 2 at 2:00 p.m. EDT.