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EURUSD hovers around 1.1800 - AM Briefing
29 Sep 2017
Trump tax reform lifts Wall Street - AM Briefing
28 Sep 2017
What is the Fed trying to tell us? - PM Bulletin
27 Sep 2017
Yellen struggles with inflation - AM Briefing
27 Sep 2017
Can cable’s rally continue? - PM Bulletin
26 Sep 2017
Investors jittery after North Korean threat - AM Briefing
26 Sep 2017
EURUSD slips again - PM bulletin
25 Sep 2017
Merkel scrambles to form coalition - AM Briefing
25 Sep 2017
Caution ahead of weekend - AM Briefing
22 Sep 2017
Fed Meeting Post-Mortem - Video Update
21 Sep 2017
Fed signals another rate hike - AM Briefing
21 Sep 2017
Trading subdued ahead of Fed meeting - Video Update
20 Sep 2017
Fed expected to reduce balance sheet - AM Briefing
20 Sep 2017
FOMC and balance sheet reduction - PM Bulletin
19 Sep 2017
Dow hits fresh record high - AM Briefing
19 Sep 2017
EURUSD continues to trend higher - PM Bulletin
18 Sep 2017
Global indices storm higher - AM Briefing
18 Sep 2017
Investors shrug off NK missile test - AM Briefing
15 Sep 2017
Sterling soars after BoE meeting - Video Update
14 Sep 2017
Bank of England meeting in focus - AM Briefing
14 Sep 2017
Look-ahead to the BoE monetary policy meeting - Video Update
13 Sep 2017
Sterling bounces as inflation picks up - PM Bulletin
12 Sep 2017
Wall Street rally lifts sentiment - AM Briefing
12 Sep 2017
Euro storms higher - AM Briefing
08 Sep 2017
ECB meeting in focus - AM Briefing
07 Sep 2017
EURUSD soars during Draghi’s press conference - Video Update
07 Sep 2017
ECB meeting, a look-ahead to Thursday - Video Update
06 Sep 2017
Wall Street wobbles, but closes off lows - AM Briefing
06 Sep 2017
WTI recovering as clean-up continues - PM bulletin
05 Sep 2017
Investors shrug off North Korean threat - AM Briefing
05 Sep 2017
North Korean nuclear test boosts gold - PM Bulletin
04 Sep 2017
North Korea rattles markets - AM Briefing
04 Sep 2017
High hopes for the latest US jobs release - AM Briefing
01 Sep 2017
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 Monday 04 September 2017

North Korea rattles markets - AM Briefing



Early moves

·         Nuclear test renews fears of escalation

·         Safe haven assets in demand

Traders are once again seeking out safe havens following the latest “show of strength” from North Korea. This weekend’s nuclear test has increased demand for precious metals, the Japanese yen and Swiss franc as investors worry about the US-led reaction to the latest provocation from the rogue state. This has also led to an early sell-off in European equities and US stock index futures, although losses so far have been modest. The worry is that this latest action from North Korea could lead to a military response from the US and allies. But even an escalated programme of sanctions (which is the favoured option) could potentially upset the global economy, particularly if it results in a reduction in trade between the US and China. On top of this, today’s trade is likely to be illiquid and prone to sharp price moves as the US is closed for Labor Day.

Stock Index Update

·         US Payroll data disappoints

·         Wages growth slows

The dollar slumped, gold and silver rallied but US and European stock indices barely budged following Friday’s disappointing US employment numbers. Headline Non-Farm Payrolls rose 156,000 in August against an expected increase of 180,000. In addition June and July’s numbers were both revised lower by around 40,000 jobs combined. The Unemployment Rate rose to 4.4% from 4.3% while perhaps most significantly Average Hourly Earnings rose just 0.1% for the month, a significant pull-back from July’s 0.3% increase. This was the second indicator published last week to show that inflation is ticking downwards, away from the Fed’s 2% target. This makes it less likely that the central bank will hike rates again this year and consequently was taken as yet another solid excuse to buy equities - even if it isn’t a particularly positive signal for the US economy.

Friday morning saw European stock indices head higher following another positive close across Wall Street and a fresh record finish for the NASDAQ. By the end of last week investors appeared to have shrugged off all their concerns about the possibility of a military confrontation between North Korea and the US and investors once again successfully bought the dip. However, this weekend’s nuclear test from the rogue state has led to a sharp “risk off” reversal and it remains to be seen if buyers will quickly emerge to take advantage of cheaper equity prices. Last week they were encouraged by comments from US Treasury Secretary Steve Mnuchin who said on Thursday that a “very detailed” tax plan was ready to go. Earlier in August markets had sold off sharply on fears that the Trump administration was falling apart.

Commodities Update

·         WTI and Brent diverge

·         Gold and silver rally on payrolls and geopolitical risk

WTI crude lost ground again last week taking its losses for August to over 6%. In contrast Brent ended the month unchanged with the difference in the fortunes of the two contracts down to the effects of Hurricane Harvey. The storm has caused significant damage to Houston and other parts of Texas. In addition to the loss of human life and widespread destruction, the hurricane has led to the shutdown of a significant percentage of US refining capacity. This has led to a sharp rise in gasoline prices. As a result WTI crude sold off as there is severely reduced demand for oil from refiners. Consequently, crude stockpiles are expected to rise over the coming weeks. But it could be a long time before we get a clear picture of the longer-term effects of the storm on US refining capacity. This is because in addition to controlled shut-downs, some refineries have been flooded and the full extent of the damage is unknown.

Gold and silver drifted lower ahead of Friday’s Non-Farm Payroll release. However, both shot higher following the report of an August payroll increase of 156,000 against an expectation of a rise of 180,000. More importantly, Average Hourly Earnings rose just 0.1% for the month, well below the +0.3% reading in July and the +0.2% expected. It is this tepid wage growth, despite an Unemployment Rate which hasn’t been much lower since 2001, which shows just how difficult it’s proving to push inflation higher. This is a particular concern given the Fed’s insistence (as made explicit in Janet Yellen’s testimony in Washington earlier this summer) that the outlook for inflation is now the major factor in deciding monetary policy. Both metals rose sharply on Monday morning following news of another North Korean nuclear test. Once again the rogue state has thumbed its nose at its neighbours and the US in an action which is bound to get a negative response.

Forex Update

·         Dollar slumps after weak payrolls

·         ECB delays asset purchase decision

The dollar slumped on Friday afternoon following the release of some disappointing US jobs numbers. The headline Non-Farm Payroll number rose 156,000 in August against an expected increase of 180,000. In addition July’s number was revised down to 189,000 from 209,000. The Unemployment Rate rose to 4.4% from 4.3% while perhaps most significantly Average Hourly Earnings rose just 0.1% for the month, a significant pull-back from July’s 0.3% increase. All-in-all, this was just another indication that inflation is heading the wrong way, as far as the Fed is concerned, and this makes it less likely that the central bank will hike rates again this year. But the greenback suddenly bounced after the ECB announced that it may not be ready to finalize its decision on next year’s bond-purchase program until December. This suggests that this week’s monetary policy statement will be dull, although Mario Draghi’s subsequent press conference may be interesting.

Friday morning saw the release of a clutch of Manufacturing PMIs from across the Euro zone. These were a bit of a mixed bag on a country-by-country basis, but unchanged for the Euro zone overall month-on-month. This helped the euro to hold on to gains made in the previous session although the EURUSD was still unable to push back above the 1.2000 level hit at the beginning of the week. While Euro zone CPI continues to pick up (even as US inflation trends lower) traders seem wary of pushing the single currency mush higher from current levels. This follows a number of signals that the ECB’s Governing Council is concerned about the strength of the euro which has rallied sharply since the beginning of the year. The danger is that declining US inflation could prevent the Fed from raising rates further this year even as a pick-up in Euro zone growth and stability pressures the ECB into tightening. This would put further upside pressure on the EURUSD rate.

Upcoming events

Today’s significant events and economic data releases include Spanish Unemployment, Euro zone Sentix Investor Confidence and UK Construction PMI. The US and Canada are closed for Labor (sic) Day.  


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Posted by David Morrison

Category: AM Bulletin

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