Trade tensions hit consumer sentiment
As we’ve discussed previously in this series, the escalating trade tensions haven’t been able to support gold much in 2018 mainly due to the simultaneous appreciation in the US dollar (USDU), which has capped gold’s gains. The repercussions of a trade spat, however, have started to reach beyond the political circles. Consumer confidence took a hit in June over the weaker outlook for US economic conditions. While the index for current conditions came in as expected, the sentiment over future business conditions and income prospects declined.
Investors should note that consumer spending (XLY) constitutes more than two-thirds of the US economy. Thus, consumer spending is an important leading indicator for future growth. A decline in sentiment for future conditions also has to do with the ongoing trade spats and this could mean a slowdown in spending, which would be detrimental to the US economic growth prospects.
Business investment slowing
As the Federal Reserve discussed in its June meeting, the business sentiment and investment spending are getting affected due to the US trade policy. Some Federal Reserve presidents have separately also discussed the impact of trade uncertainties. The St. Louis Fed president and the Atlanta Fed president have already warned about the escalating trade disputes weighing on businesses.
Consumers and businesses feel the heat of trade spats
US consumers and businesses have already started to feel the heat of trade disputes, which are not expected to calm down completely anytime soon. Harley-Davidson (HOG) has become the prime example of a business caught between the trade spats. The company announced it would shift some of its production out of the US (SPY) (SPX) to avoid tariffs. The growing uncertainties from trade spats are expected to support gold (GLD) (JNUG) and other precious metals in the second half of the year. Moreover, if the Fed gets more concerned about the broader impact of trade disputes on the economy, it could decide to proceed cautiously on the interest rate hike path, which again is a positive for non-income-yielding assets such as gold.