The major mover of the week was gold. This appears to have been due to worries regarding an Iran/U.S. conflict (more on that later). Elsewhere, it was a pretty calm week altogether.
The interlinkage between trade and monetary policy continues to play out as expected, with markets predicting an 86% probability of a Fed rate cut at the July meeting. It seems unlikely that the probability would be this high in the absence of serious trade concerns.
As said last week, prolonged uncertainty on trade could see global industrial production momentum fall back to zero by October, unless there is a trade truce before then. It continues to seem likely that the less the market believes in a trade resolution, the more it will believe in stronger reflation from both the Fed and China.
With a potential meeting on the horizon between Trump and Xi, it now seems that there is a close to zero chance of a trade deal happening at this meeting, if the meeting happens at all. The best-case scenario for the G20 summit at the end of this month would be a truce like the one Xi and Trump made at the G20 in Argentina in early December of last year, i.e. both sides stepping back and preparing to resume negotiations.
The worst-case scenario would be that both parties remain at an impasse without any agreement on key principles and the US proceeds to apply an additional 25% tariff on $ 300bn of Chinese imports.
If the tariffs are applied as outlined then the market could have a short term move downwards, but a vigorous policy response from both the US and China could then be expected, which might lead to upgrades to GDP growth forecasts for 2020.
Turning to Brexit, Boris Johnson took a huge lead in the race to become the U.K.'s next PM, after Tory lawmakers held their first round of voting. Odds from bookmaker Ladbrokes imply an 80% chance of Johnson taking the top job, while nearest challenger Jeremy Hunt has a 17% shot, according to Ladbrokes.
Given Johnson’s stance on Brexit, this obviously increases the likelihood of a no-deal Brexit, but an actual no-deal outcome still seems very unlikely since all rhetoric right now is aimed at the 100,000 or so Tory party members – mostly Brexiteers – who will in the end decide who becomes Prime Minister. Should Boris Johnson become Prime Minister he will face the same problems and same parliamentary arithmetic as Theresa May. So it seems most likely that no-deal will still not happen.
Back to the brewing Iran-U.S. conflict. American officials released images which, they said, show that Iran was involved in an attack on an oil tanker near the entrance to the Persian Gulf on Thursday. This is one of a pair of incidents that have raised tensions between the U.S. and the Islamic Republic over the past day.
This appears to have been the main reason that gold did so well this week. Gold still has a clear role to play in investment portfolios.