Safe havens surge as fear grips global markets

Market volatility surged sharply yet again on Thursday as equities tumbled on political concerns and fears of a potentially escalating global trade war. These fears have been brought on by US President Trump’s continuing campaign to impose massive US import tariffs, and the global retaliations that are expected to follow. Trump is expected to sign a memorandum imposing substantial (~$50 billion) and wide-ranging tariffs on Chinese imports in a bid to punish China for intellectual property infringements. China has already threatened to retaliate against US companies and farmers that rely heavily on exports to China. This follows Trump’s announcement early in the month about impending tariffs on steel and aluminum imports from many countries.

These announcements have also coincided with ongoing political chaos in the White House that has been punctuated by high-level officials leaving the administration and intensifying investigations into Trump’s campaign dealings with Russia prior to the 2016 election.

Further exacerbating investor fears has been a sharp fall in technology stocks that has been driven in part by a data breach scandal that has rocked shares of Facebook (FB).

On Wednesday, the Federal Reserve released its latest policy statement, which leaned slightly hawkish with its higher growth and interest rate projections going forward. Though the Fed’s priced-in decision did not in itself make a serious negative impact on equity markets, new Fed Chair Jerome Powell stated in the subsequent FOMC press conference that Trump’s tariff plans had become a concern for Fed officials with respect to potentially hindering economic growth.

Amid fears of a global trade war that could seriously hurt both companies and individuals in all markets involved, investors flocked to safe-haven assets early on Thursday, including government bonds, the Japanese yen, and to a lesser extent, gold. Bond yields dropped sharply as investors turned to the perceived safety of US Treasury bonds amid growing concerns about Chinese trade retaliation. The Japanese yen was also bid up on its safe-haven status, pushing USD/JPY down to re-test long-term lows around the 105 handle. Though gold fell on Thursday due to a rebound for the US dollar, the precious metal remained elevated from its sharp surge a day earlier.

While the current market volatility and flight-to-safety can be expected to prevail as long as fears of a large-scale global trade war remain, much will depend on China’s immediate response to Trump’s tariff plans and whether negotiations can be made. While China will certainly work to protect its own trade interests, any escalation of trade disputes and retaliation is also not in the country’s best interests. Therefore, the expectation is that this trade-driven volatility is likely to subside again as negotiations continue, though market volatility is still expected to remain at a significantly higher plateau going forward than the unusually low levels experienced last year.