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Global trade tensions cast long shadow over market sentiment

As the temperature ticks up with the coming summer, so do trade tensions, with the global economy's fate lying in the balance.

Safe assets are more important than ever The US dollar has ticked down, for now The fate of the Pound Sterling is undecided, as Prime Minister Theresa May prepares to step down

Author: Han Tan, Market Analyst at FXTM, comments on global trade tensions.

As the northern hemisphere heads into summer season, market sentiment around the world is pointing firmly south due the rising heat that is being felt in the air from global trade tensions.

Investors have overall received notification that the trade tensions theme is very much a global story and it will involve multiple nations across the world. This is by no means a positive backdrop for either market sentiment or economic momentum, and we should be prepared for number of potential revisions to world economic growth projections due to the uncertain external backdrop over global trade. 

External uncertainties paint picture of more resilient demand for safe assets

Such an environment of a number of external uncertainties around global trade will ensure that appetite for safe havens remains resilient. Investors are expected to tread very carefully towards adding risk in their portfolio amid the delicate market conditions.

Gold has managed to break past the $1,309 handle after having surged by about 2.7 percent since May 30. The Japanese Yen is holding around its strongest level against the US Dollar since January, hovering around the lower-108 region at the time of writing. 10-year US Treasury yields have sunk below 2.13 percent to their lowest since September 2017.

With global equities having just posted its first monthly loss of 2019, putting more risk on the table doesn’t appear to be a viable option for investors at this point in time.

Unless President Trump makes a sharp U-turn and starts caring more about the global economy against his campaign promises, markets will have to come to terms with an investment climate that’s dominated by trade tensions and heightened insecurities.

Softer Dollar allows for mild reprieve in Euro, Pound… for now

The US Dollar Index has softened towards 97.75 at the time of writing, allowing G10 currencies to have some breathing space. The Greenback may ease further should the May US Manufacturing PMI due Monday come in below market expectations, as signs of a softer US economy are bound to intensify broader fears of the anticipated global economic slowdown for 2019.

Despite its recent relief against the Greenback, the Euro also stands in line to come under renewed downward pressure should its economic data releases this week disappoint. This, in turn, should allow the European Central Bank to maintain its downbeat stance at the June 6 policy meeting. Clouds over the Euro’s outlook will only grow darker should the US-China dispute intensify and impact economic demand in Europe, while Italy’s fiscal dispute with the EU administration threatens to erode investor sentiment surrounding the Eurozone.

Likelihood of Eurosceptic emerging at number 10 to weaken Pound further

Pound investors will be keeping a close eye on the hunt for a new UK Prime Minister, as Theresa May prepares to step down from her position as Prime Minister later this week.

Although the change at the top isn’t expected to be completed until end-July, Sterling may still react to the political jostling between the 13 PM candidates, as fears of a no-deal Brexit cast a long shadow over this leadership transition.

The Pound can extend its slide above 3% against the Dollar last month to its lowest levels since January if fear emerges that a Eurosceptic candidate will emerge as the next UK Prime Minister.