Global Markets Waver as Trade War Fears Resurface
The optimism sparked by softer-than-expected U.S. inflation data proved fleeting, as European stocks and U.S. futures retreated on Thursday, with investors once again grappling with the specter of an escalating global trade war. Asian markets also reversed earlier gains, while safe-haven assets like gold and the Japanese yen experienced renewed demand.
The pan-European STOXX 600 index, a broad gauge of European equities, experienced a slight dip in early trading, reversing some of the momentum gained from a 0.81% rise the previous day. Germany’s DAX index, a key indicator of the Eurozone’s largest economy, fared worse, declining by 0.62%.
Futures markets pointed to a weak opening for Wall Street, with S&P 500 futures indicating a 0.54% decline and Nasdaq futures suggesting a 0.78% drop. This anticipated weakness in U.S. equities suggests that the previous day’s rebound, driven by tech shares reacting to the inflation data, was not sustainable in the face of broader trade war anxieties.
In Asia, the picture was similarly bleak. Hong Kong’s Hang Seng index fell by 0.58%, while Japan’s Nikkei index surrendered earlier gains of as much as 1.4% to ultimately close 0.1% lower. This widespread decline across major global markets underscores the pervasive nature of the trade-related concerns weighing on investor sentiment.
The resurgence of trade war fears has propelled gold prices higher, with the precious metal nearing its record peak from February 24, reaching a high of $2,947 per ounce and coming within $10 of that milestone. The yen, another traditional safe haven, also strengthened, reflecting investors’ desire to shield their assets from the potential fallout of trade tensions.
The recent weakness in global stocks, particularly U.S. equities, can be attributed to President Trump’s unpredictable tariff policies, which have created uncertainty and dampened growth expectations among businesses and investors. While Wednesday’s U.S. consumer price data offered a brief respite, the underlying concerns about the impact of tariffs on the global economy remain.
The U.S. consumer price index, a key measure of inflation, rose at the slowest pace since October last month. However, these figures do not yet fully reflect the impact of Trump’s tariff campaign, leaving investors to anticipate the potential inflationary pressures that could arise in the coming months. Market participants are closely monitoring U.S. producer price data, due later in the day, for further insights into the inflation outlook.
According to Mohit Kumar, chief European economist at Jefferies, markets are primarily driven by concerns about Trump’s tariffs and their potential impact on U.S. economic growth. Beyond the direct effects on growth and inflation, tariffs create uncertainty, which is detrimental to investment and the outlook for companies involved in cross-border trade. Jefferies’ view is that tariffs are primarily a growth story rather than an inflation story.
Trump’s decision to increase tariffs on all U.S. steel and aluminum imports, which took effect on Wednesday, has intensified the trade war, prompting retaliatory measures from Canada and Europe. This escalation has heightened fears of a global economic slowdown and further disruptions to supply chains.
European stocks have generally outperformed U.S. equities this year, supported by government plans for increased defense spending and the possibility of a peace agreement in Ukraine. Despite recent declines, European stocks remain up around 6.6% for the year, while the U.S. S&P 500 is down almost 5%.
Michael Brown, senior research strategist at Pepperstone, notes that the market’s inability to sustain gains is a "big old red flag" for potential dip buyers. This caution reflects the underlying fragility of investor confidence in the face of persistent trade-related headwinds.
The Japanese yen strengthened against the dollar, bolstered by expectations of interest rate hikes by the Bank of Japan and increased demand for safe-haven assets. The euro edged lower against the dollar, retreating from a five-month high reached earlier in the week.
In Germany, the outgoing lower house of parliament is scheduled to hold a special session to debate a substantial fund for infrastructure development and significant changes to borrowing regulations. This initiative reflects the German government’s efforts to stimulate economic growth and address long-term investment needs.
U.S. Treasury yields remained relatively stable, with the 10-year yield holding steady after rising in the previous two sessions. Crude oil prices edged higher, building on gains from the previous day, as traders assessed the impact of trade tensions on global demand.
The current market environment is characterized by heightened uncertainty and risk aversion, as investors grapple with the potential consequences of an escalating global trade war. The interplay between trade policies, inflation concerns, and economic growth expectations will likely continue to drive market volatility in the coming weeks.
The ongoing trade disputes have created a complex and challenging landscape for businesses and investors alike. Companies are struggling to navigate the uncertainty surrounding tariffs and potential retaliatory measures, while investors are seeking to protect their portfolios from the potential fallout of a global economic slowdown. The situation remains fluid, and market participants must carefully monitor developments and adjust their strategies accordingly.
