With global uncertainty remaining high — and potentially set to rise even further — the S&P 500 closed in the red for the second week in a row, while XAUUSD continued its rally, climbing past $4,900 per ounce. XAGUSD also pushed higher, supported by safe-haven demand and its industrial-use exposure, and continued to outperform many risk assets. Whether this trend will continue, and whether risky assets could face further losses, will depend mainly on two factors.
The first is the course — or better said, the evolution — of geopolitics.
Starting with trade wars, although Donald Trump initially said he would drop plans for additional tariffs on European imports after talks with NATO Secretary General Mark Rutte about Greenland, over the weekend, he threatened Canada with 100% tariffs if Ottawa proceeds with a trade agreement with China.
As for the latter, China may already feel some lingering resentment toward the U.S. after losing access to some of the cheap Venezuelan oil it once relied on.
In the face of direct conflicts, negotiations between Russia and Ukraine have once again stalled despite U.S. mediation efforts. Neither side has shown any willingness to compromise on territorial issues, which remain the main barrier to a peace deal, and, for the same reason, the next round of talks, scheduled for February 1 in Abu Dhabi, is unlikely to yield meaningful progress.
Meanwhile, tensions are rising again in the Middle East as the risk of a U.S. attack on Iran increases, amid the largest U.S. military build-up in the region since the Iraq war. If such an operation turns into a prolonged and chaotic conflict, rather than a swift and contained action like the one carried out against Venezuela, the entire region could be destabilized, and markets would come under severe pressure.
The second factor that could continue weighing on sentiment is President Trump’s attack on the Federal Reserve, particularly its chairman. Following an investigation into Jerome Powell over the renovation of the Fed’s Washington headquarters, Trump has openly warned that if Powell remains on the Fed’s Board of Governors after stepping down as chair — which he is legally allowed to do until 2028 — “his life will not be a very, very happy one.”
If a politicized candidate is ultimately appointed, someone who is guided not by inflation data or labor market conditions but by presidential demands, confidence in the Fed and the U.S. institutional framework would be severely damaged. Such a scenario could trigger a sell-off of the U.S. dollar and Treasury bonds.
Where things go from here remains to be seen. For now, expectations are that the Fed will keep interest rates unchanged at Wednesday’s meeting despite political pressure from Trump. As for the Middle East and Ukraine, hopes remain, but markets appear to be preparing for the worst.