By Daniela Hathorn, senior market analyst at Capital.com
Global markets have begun the week on the back foot as renewed trade tensions, sticky inflation data and rising geopolitical risks have combined to unsettle investors. What initially looked like a relief rally following a Supreme Court decision on tariffs has quickly faded, giving way to a more complex and uncertain landscape. From trade policy to Federal Reserve expectations, and from gold’s resurgence to oil’s geopolitical risk premium, investors are once again navigating a market defined by crosscurrents.
Tariffs: relief rally fades as uncertainty deepens
Markets initially welcomed the Supreme Court’s ruling that challenged the legality of certain tariffs imposed under emergency powers. The early reaction reflected hopes that a rollback in tariffs could reduce uncertainty and potentially ease inflationary pressures. However, that optimism proved short-lived. Rather than stepping back, the Trump administration swiftly pivoted, invoking Section 122 of the Trade Act of 1974 to impose a universal 15% tariff for up to 150 days. While this caps tariff levels below some of the previously threatened rates, it effectively raises the average tariff burden in the short term and reintroduces significant policy uncertainty.
The key issue for markets is not just the tariff level itself, but the unpredictability surrounding what comes next. As a result, stocks started the week lower, the US dollar weakened, treasury prices fell and gold moved higher.
Investors appear to be reassessing growth prospects in light of sustained trade frictions and the potential for retaliatory measures from trading partners. The so-called “sell America” trade has re-emerged modestly, reflecting concerns about US growth, fiscal sustainability and strained international relations.
A shift in negotiating power?
Beyond the immediate 150-day window, the situation becomes more intriguing. The 15% cap potentially limits the administration’s leverage in ongoing trade negotiations with major partners such as China and India. Several trade deals were negotiated under the assumption that higher tariffs could be imposed.
Now, trading partners may perceive a ceiling on US tariff threats, potentially altering the balance of power. While this creates near-term uncertainty — something markets inherently dislike — it could, over the longer term, result in lower overall tariff levels than previously feared. For now, however, the “fog of war” in trade policy is weighing on risk appetite.
Inflation and the Fed: soft landing still intact
Compounding the trade narrative was Friday’s release of the latest PCE inflation data, the Federal Reserve’s preferred inflation gauge. Core PCE rose 0.4% month-on-month, with the annual figure ticking up to 3%, slightly above expectations. Headline inflation also surprised modestly to the upside. Importantly, the data did not suggest a reacceleration in inflation. Instead, it reinforced the “soft landing” narrative:
- Growth is slowing but remains positive.
- Inflation is easing, though gradually.
- The labour market remains resilient.
- Overheating risks appear contained.
This combination supports the view that the Federal Reserve can afford to remain patient. There is little urgency to cut rates, but equally no clear case for hiking them. That said, tariff uncertainty complicates the outlook.
Tariffs function similarly to a consumption tax. If maintained, they raise import costs and feed into goods prices. If removed, they can generate a one-off disinflationary effect — but also potentially boost consumer spending as costs fall, adding second-round inflationary pressures. This creates a complex backdrop for policymakers. Some real-time inflation metrics suggest disinflation may accelerate in coming months, though official data has yet to fully reflect that trend.
Meanwhile, internal divisions within the Fed could widen. Recent commentary and meeting minutes reveal a spectrum of views, from officials comfortable with rate cuts to those wary of persistent inflation. With new leadership changes ahead, the policy debate is likely to intensify.
Data reliability and labour market questions
Another emerging theme is scepticism around economic data reliability. Repeated revisions to labour market figures, combined with the lingering effects of last year’s government shutdown, have prompted questions about how accurately official data reflects real-time conditions. Add to this the growing influence of AI and structural changes in productivity, and the economic outlook becomes harder to interpret.
Despite these concerns, central banks remain data driven. But markets are increasingly aware that the data itself may be noisier than usual, adding another layer of uncertainty. With a relatively quiet economic calendar ahead, commentary from Fed officials this week could have an outsized impact on market direction.
Gold regains momentum as safe haven demand returns
Against this backdrop, gold has regained bullish momentum. After a period of heightened volatility earlier in the year, the precious metal appears to be stabilising and breaking through recent resistance levels. A combination of factors is underpinning the move: trade policy uncertainty, fiscal concerns as tariff revenues fluctuate, geopolitical risks, and a softer US dollar.
While the extreme volatility seen earlier in the year is unlikely to be sustained — and arguably unhealthy for the market — the broader fundamental backdrop remains constructive. Silver, by contrast, may lag. With greater exposure to industrial demand and the AI-driven investment narrative, it faces more uncertainty if tech-sector momentum slows.
Gold (XAU/USD) daily chart
Past performance is not a reliable indicator of future results.
Oil prices climb on Middle East risk premium
Oil markets have also come back into focus as tensions in the Middle East intensify. Brent crude has pushed above the $70 level, supported by rising geopolitical risk. Iran’s strategic position near the Strait of Hormuz — through which roughly 20% of global oil supply flows — means any disruption could have significant consequences.
Three broad scenarios are emerging:
- Limited strike, minimal supply disruption
Likely to cause short-term volatility and a temporary spike in oil and gold, but with limited lasting impact. - Escalation with supply disruption
The most disruptive scenario, potentially pushing oil towards $90–$100 per barrel and weighing heavily on equities. Central banks would face a renewed inflation-growth trade-off. - Prolonged tension without direct conflict
Sustained geopolitical rhetoric keeps a risk premium embedded in oil prices, but without major market dislocation.
At present, broader financial markets appear to be discounting only a limited escalation. A significant deterioration would likely catch many investors off guard.
Brent daily chart
Past performance is not a reliable indicator of future results.
Equities and the dollar: awaiting a catalyst
US equity indices remain range-bound, lacking a strong narrative catalyst. The AI theme, which has driven markets higher for the past three years, appears to be transitioning from a story of boundless opportunity to one of rising scrutiny and diminishing marginal returns.
This week’s Nvidia earnings could prove pivotal. Strong results are widely expected. However, the market’s reaction will be telling. If even a solid earnings beat fails to ignite upside momentum, it could signal deeper concerns about valuations and the sustainability of the AI-driven rally. Conversely, a positive surprise could provide the spark equities need to break out of their recent range.
As for the US dollar, it remains under pressure amid trade uncertainty and questions around fiscal dynamics. Its trajectory will likely hinge on how inflation and Fed expectations evolve in the coming weeks.
