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Early moves

·         European equities weaker in early trade

·         Safe havens still in demand

European stock indices are a touch weaker this morning after last night’s wobble on Wall Street. For a few hours yesterday it felt as if US investors had suddenly woken up to the dangers of the continued provocation from North Korea. However, the major US indices bounced off their lows and never came close to testing downside support on the trading range that has been in place for most of the summer. As far as the S&P500 is concerned that means a band roughly between 2,420 and 2,480. With the US indices firmer this morning, this means the majors are closer to the higher end of this range than the lower.

Nevertheless, there’s still some evidence that some players are taking some risk off the table. The yen remains strong with the USDJPY creeping closer to the 108.00 support area. Meanwhile, gold and silver appear well supported with the former establishing itself comfortably above its old resistance level of $1,300.

Stock Index Update

·         Sharp sell-off on Wall Street

·         But US equities bounce off lows

Yesterday’s trading session started off positively with all the European majors solidly in the black. Sentiment was generally positive with most investors expecting a repeat of previous trading patterns whenever North Korea has initiated a hostile move. On every occasion over this summer, European and US equities have bounced back sharply after an initial sell-off in response to every fresh provocation from the North Korean regime. However, it became clear soon after the US open that investors were no longer in holiday mood and that North Korea is a problem that has been ignored for too long. Unfortunately, it’s difficult to see what can be done to placate and disarm a regime that acts as if it has nothing to lose. Any military solution will undoubtedly involve a heavy toll of civilian casualties on both sides. Yet the US threat of taking sanctions against North Korea’s trading partners (which include China, India and Pakistan) not only threatens the global economy through a trade war but risks escalation into outright hostilities between the US and her ideological opponents.

Commodities Update

·         Oil higher as US refiners reopen

·         Gold and silver add to recent gains

Crude oil made modest gains in early trade yesterday. Both WTI and Brent prices rallied on evidence of a gradual pick-up in refining activity in the Gulf of Mexico. This should see demand for WTI recover although some analysts have suggested that the back-up in crude stockpiles due to refineries being out of action thanks to Hurricane Harvey will take time to unwind. Nevertheless, the price rise in crude accelerated as the US trading session got underway so that WTI was up over 3% at one stage, as gasoline prices fell over 3%. There was also talk that Russia and Saudi Arabia (the world’s top two oil producers) had met to discuss extending the OPEC/non-OPEC output cut agreement beyond March next year. In addition, there are concerns that US shale oil production is lower than previously estimated. It now looks unlikely that the US will come close to producing the 10 million barrels per day early next year as forecast by the EIA earlier this summer.

Precious metals inched higher yesterday afternoon after a slow start which saw prices begin the main European session in the red. However, buying picked up later in the session as investors looked at ways to hedge risk. Many were concerned by a pull-back in US stock indices following Monday’s Labor Day break. European stock indices had held up well considering the spike higher in geopolitical tensions. This led many investors to believe that markets would shrug off their latest concerns as they had throughout the summer. The latest push higher in precious metals followed news that North Korea had undertaken another nuclear test over the weekend. This was the regime’s sixth ever test and many orders of magnitude larger than the country’s last test just under a year ago. This is just the latest provocation from North Korea which has led to a sharp rally in precious metals. Last week they fired a missile into the Pacific which flew over Japanese territory. This followed a threat the previous week to fire missiles towards Guam, a US territory in the Pacific.

Forex Update

·         Japanese yen continues to rally

·         Dollar slips on Brainard comments

The euro struggled in early trade yesterday morning following the release of a clutch of disappointing data releases. Spanish, Italian and French Services PMIs all came in weaker than expected and well below the prior month’s readings. The German PMI showed a modest improvement, but this wasn’t enough to boost the overall Euro zone Services PMI which slipped to 54.7 from 54.9 previously. Euro zone Retail Sales were also a disappointment falling by 0.3% in July following a 0.6% rise in June.

Later in the day the euro made back its early losses and it was the dollar’s turn to struggle. This was down to comments from Federal Reserve Governor Lael Brainard. FOMC-voting member Brainard said that the central bank should be cautious about tightening monetary policy until there was evidence that inflation was heading back towards the Fed’s 2% target. However, she said that conditions had been met for the central bank to begin reducing its balance sheet.  In addition there were ongoing concerns over the tensions across the Korean peninsula. This was evident from the continued rally in the safe-haven Japanese yen. The USDJPY fell sharply, breaking below 109.00. However, the area around 108.00 provides a more significant area of support for the dollar.

Upcoming events

Today’s significant events and economic data releases include German Factory Orders, Italian Retail Sales. From the US we have the Trade Balance and ISM Non-Manufacturing PMI and there’s a rate decision from the Bank of Canada.

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Posted by David Morrison

Tagged: AM Bulletin briefing

Category: AM Bulletin


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