by Pinchas Cohen
Key Events
Yesterday, global markets began the week with risk-off trading in Asia, continued with risk-on sentiment across almost all the European financial markets (up until the last 70 minutes of trading)—even as US futures and Treasuries traded risk-off—and came full circle when US trading ended the day in risk-off mode.
Today, European markets appear to be embracing risk-off sentiment along with the rest of the world as North Korean tensions reheat, a second, potentially even more destructive hurricane threatens the US and the impending American debt ceiling congressional debate takes shape.
While yesterday almost every sector in European stocks advanced, today just about all retreated.
US futures fluctuated this morning, while Treasuries edged lower, though not as a result of an increase in risk appetite. Rather, it's because of a correction after dovish comments from Federal Reserve policy makers yesterday caused bonds to surge.
While investors are bracing for an intercontinental ballistic missile launch by North Korea, they should remember that this is being billed by Pyongyang as in celebration of the country's “foundation day” on Saturday. The US celebrates Independence Day with fireworks; not to be outdone, North Korea celebrates with bigger firepower.
Indeed, it’s become the secluded country’s custom to sabre rattle around this period, though nothing has gone past the point of no return – yet. However, Kim Jong-un has never before gone head-to-head with an American president quite like Donald Trump. It's difficult to predict what may happen next, but even if nothing changes and business continues as usual next week, in the short term we can probably expect increased market volatility; in the longer-term, however, this should be considered nothing more than noise.
Still, when equity valuations are at historical highs and the US bull market is the second longest in history, any added uncertainty could be the final straw.
Fact is, market participation, including within the S&P 500, has been dwindling since June in a negative divergence to the rising prices into fresh records—and again, in contrast to the late August rise which reached less than half of one percent from the August 9th all-time-high. Additionally, should the current risk-off sentiment drag equities down another 2 percent, a major reversal—both a H&S top and crossing below the uptrend line since February 2016—will have taken place with another 10-percent decline implication.
Add to that, the lack of consensus among the US, China and Russia on how to effectively pressure Kim Jong un to abandon his nuclear ambitions. Both Russia and China are resisting implementing more punitive measures, while the US is calling for additional sanctions. It doesn’t help that China has its own, additional motives. It is North Korea's sole trading-partner, which helps China’s economy.
Investors rerouted capital out of equities and commodities—especially raw materials—and into bonds. Currencies remained flat, while the dollar edged down.
Crude oil extended its advance for a fifth day, stopped by the resistance of the August 21 peak, to what is still considered a return-move within the long-term, as represented by the falling channel since February, while it puts into question the down-trend in the medium term, as it crossed above the midterm falling channel since August 1.
Up Ahead
- Consensus is divided about today’s Bank of Canada rate decision as the nation's economy has grown faster than predicted.
- The EU is due to rule on Intel's (NASDAQ:INTC) challenge of its antitrust fine.
- U.S. economic data may show a small widening of the July trade deficit after a narrowing in June when exports rose and imports fell.
- China trade figures this week are anticipated to show another month of solid export growth, while FX reserves probably continued to rise on stricter capital controls, robust growth and a stronger yuan, according to Bloomberg Intelligence.
- The European Central Bank meets on Thursday. Mario Draghi will express concern over the euro’s strength, but won’t say much about his asset-purchase program’s future, according to a survey. If that’s true, the euro Is likely to take a hit, as investors were hoping for clarity on the ECB’s bond-buying program and its winding down.
- On Thursday, the US trade balance, unemployment claims and the Fed’s Beige Book release may help investors – and the Fed – with its bearing on the path to interest rate normalization, after Federal Reserve speakers so far have continued to urge caution on tightening policy.
Market Moves
Stocks
- Japan’s TOPIX reversed earlier losses to end up 0.1 percent. The KOSPI index in South Korea slid 0.3 percent as did Australia’s main gauge. The Hang Seng Index declined 0.6 percent in Hong Kong on low volumes and China’s equity benchmarks, including the Shanghai Composite, were also lower.
- The Stoxx Europe 600 Index fell 0.3 percent as of 8:38 London time (3:38 EDT), its lowest in a week.
- The U.K.’s FTSE 100 slid 0.4 percent to the lowest in more than a week.
- Germany’s DAX declined 0.2 percent.
- S&P 500 Futures increased 0.1 percent to 2,462.25.
Currencies
- The euro advanced 0.1 percent to $1.1927, the strongest in more than a week.
- The Dollar Index dipped less than 0.05 percent to 92.18, after declining to almost a full percent, in its third day of losses.
- The British pound declined less than 0.05 percent to $1.3029.
- The Japanese yen climbed 0.1 percent to 108.65 per dollar, the strongest in 20 weeks.
Bonds
- The yield on 10-year Treasuries gained one basis point to 2.07 percent.
- Britain’s 10-year yield fell two basis points to 1.011 percent, the lowest in more than a week.
- Germany’s 10-year yield dipped less than one basis point, the lowest in more than 10 weeks.
Commodities
- Gold dipped 0.1 percent to $1,338.58 an ounce, the first retreat for the precious metal in a week and its biggest decrease in almost two weeks.
- West Texas Intermediate crude advanced 0.2 percent to $48.77 a barrel, the highest in almost four weeks.
- The Bloomberg Commodity Index slid 0.1 percent to 85.29, the first retreat in a week.