August has been a challenging month for markets. While many traders were out of their desks enjoying the summer season, US-China trade conflict reached a critical point. Both countries hit each other with new tariffs which came into effect on Sunday. Even though the trade dispute seemed to be de-escalating last week, helping some risk assets recover, many investors fear that the trade conflict is too far from being entirely resolved. Whether you’re equity, fixed income, commodity, or a currency trader, trade-war remains the most significant influence on all these asset classes.

With many uncertainties surrounding the global economy expect volatility to remain elevated in September. Determining the impact of trade wars on economic growth and corporates’ profitability is not an easy task, especially when it comes to consumers and businesses’ behavior. The fear of the unknown will eventually lead to less consumer spending, and companies cutting capital expenditures. That’s what we call self-fulfilling prophecy in economic terms. The consequences of pessimistic expectations by investors can lead to a recession and easing policies by central banks will only have limited impact to prevent such an outcome.

The surge in negative bond yields, which has reached a record $17 trillion led many investors to jump to US bonds. A 1.5% yield on US Treasury bonds may not look very attractive but compared to -0.7% for its German counterpart and -0.26% on JGBs, it’s definitely a better alternative. However, the move into US bonds is causing a headache to the White House as the Dollar reached a new two-year high on Friday. The Dollar’s strength will draw more attention from President Trump as he might push the Treasury Department to intervene in the currency. If Treasury Secretary Steven Mnuchin starts warming up to the idea of intervening in the Dollar this will take us into even riskier territory in the ongoing trade conflict, which is a currency trade war.

Probably that’s why Gold and Silver prices remained elevated during last week, ignoring the strength of the US Dollar and relief rally in equities. If the Dollar Index begins approaching its 2016 highs of 103, President Trump may use all his influence to push the Treasury Department and the Federal Reserve into intervening. In such circumstances there won’t be a better place to be other than holding the yellow metal.  

US non-farm payrolls report on Friday is the key event on the data front. So far, the jobs market remained one of the bright spots of the US economy, and if it remains strong, there may be less incentive for aggressive easing by the Federal Reserve. Manufacturing and services ISMs will also be closely scrutinized by investors, especially after manufacturing PMI contracted for the first time in nearly a decade in August.

With several Fed officials speaking this week and Fed’s beige book due to be released on Wednesday, we’ll probably get a clearer picture of the US economic prospects in the next few days.

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