The Federal Reserve remains in tightening mode with US growth and inflation trending higher, while trade war concerns between the United States, China and the EU have dominated attention.

Parallel to these events, the US administration remains supportive towards providing further stimulus to an economy that is already near full employment, with the overwhelmingly strong fundamentals encouraging traders to buy the USD.

Looking at the bigger picture, strong economic growth in the US – despite signs of softening momentum elsewhere in the developed world – has reminded everyone of the divergence between the United States and its developed counterparts.

This initially provided support for equities.

However, geopolitical uncertainty and the threat of more protectionist policies from President Trump have since returned to install downside risks for the markets.

It is possible that we are in the late stage of the current economic cycle with some indications of economic growth peaking, but there are no signs of a recession yet.

In such economic conditions and with market uncertainty from trade war headlines, equity investors should be more cautious when investing in the stock markets.

A more selective approach and a diversified portfolio are likely to be required over the second half of 2018, as valuations are expected to be challenged in the months ahead with the risk of volatility remaining at high levels.

Given that inflation will likely be a key factor driving monetary policy across central bank expectations in the second half of 2018, investors need to keep a close eye on Oil prices.

The decision by OPEC and non-OPEC members to raise crude supplies by about one million barrels starting from 1 July was initially considered a negative factor for Oil prices.

However, the rise in supply from some OPEC and non-OPEC members will be met with a decline from others, which makes doing the math complicated for investors when betting on the next direction of prices.

Iran is likely to remain in focus over the second half of 2018. The nation currently faces the re-imposition of US sanctions on its Oil exports after the Trump administration’s withdrawal from the nuclear deal.

Venezuela is also on investors’ radars as there are further signs that the Oil industry is entering a dangerous phase.

Meanwhile, Libyan Oil supply is also at risk with the current political mess.

Together, these three countries may contribute to a fall of more than two million barrels a day by the end of 2018, which is likely to keep Oil prices supported in the second half of 2018.

This might be what has encouraged Trump to state on social media that he has asked King Salman of Saudi Arabia to increase Oil production.

One other factor investors and traders should also keep a close eye on are US Treasury yields.

The gap between short- and long-term US bond yields has fallen to its narrowest levels since 2007, with investors concerned that the closer we get to the inversion, the bigger the probability of a potential recession becomes.

It has been another interesting half year for the financial markets.

The first half of 2018 has seen both economic fundamentals and political risk in an ongoing battle with each other for market influence.

Overall, Oil prices, inflation, interest rate expectations, the Dollar and trade tensions should be at the top of investors’ radars over the second half
of 2018.

These factors will tell us what we need for trading in Q3 2018.

Signup with FXTM for free today and Get the full Quarterly Market Forecast to follow the market!