During today’s session, investors should react to the publication of the minutes of the last Fed meeting. On the other hand, while fears about tensions between North Korea and the US have softened, worries about the situation Politics in the US worsened after US President Donald Trump had closed two consultative bodies on economic matters yesterday in the face of the resignation of prominent businessmen on board.
Fears about the terrorist attack in Barcelona, as well as political uncertainty in the US and still some geopolitical tension shall led investors to opt for safe haven assets.
European markets were downtrending, reflecting the behavior of the US market, as well as renewed fears about tensions between the US and Korea, with the news that the US and South Korea Start their annual military exercises today, which are expected to last for 10 days between 21 and 31 August and will be a test of North Korea’s behavior. Although planned for some time now, these exercises come at a delicate time, after several weeks of an exchange of war rhetoric between Washington and Pyongyang that drew the worst fears, although last week tensions have subsided with statements by Kim Jong that said Which for now would contain his plans. Expectations are mostly concentrated at the Jackson Hole Conference at the end of the week.
These days, the environment in the global stock markets is marked by an expectation of the Annual Central Bank Conference to be held in Jackson Hole later this week, although most analysts are not expecting Janet Yellen and Mario Draghi , Presidents of the FED and the ECB, to bring to the market great news about the conduct of their monetary policies.
Mario Draghi’s intervention in Lindau (Germany) will be closely monitored and may lead to some volatility in the markets.
In a speech delivered yesterday in Lindau, Germany, Mario Draghi gave no indication of the next steps in terms of monetary policy, only emphasizing that the recent financial crisis forced economists to readjust the existing economic models.
The monetary policy outlook on both sides of the Atlantic is now focused on the gradual removal of the ECB’s current expansionary measures and on the normalization of the balance sheet by the FED, after the Central Bank has begun the cycle of rising interest rates.
The US market ended higher on Friday. The day was marked by the Conference of Central Banks in Jackson Hole, but more specifically by the interventions of the Presidents of the FED, Janet Yellen, and the ECB, Mario Draghi. These speeches were long awaited, but neither offered any significant signal on the conduct of their respective monetary policies. Janet Yellen focused her speech on banking regulation and improvements in the US economy, while Mario Draghi focused more on his concern about protectionism.
North Korea’s firing of a missile over Japan has had an immediate impact on the financial markets. Stocks reacted negatively, and the Dollar fell to a four-month low against the Yen, although it subsequently recovered. Investors opted for safe haven assets, such as Gold, US Treasuries and the Yen. The Gold price has peaked since November last year.
In the pre-opening, European markets were trading on positive ground, as investors followed the stance on Wall Street and Asian markets. Attentions seem to be shifting away from the aggravation of geopolitical tensions to other issues, with developments related to Brexit. Today is the third day of negotiations between the UK and the European Union. In the business field, to highlight the results of the French Carrefour, so the retail sector should attract attention.
In exchange terms, the higher the inflation, the greater the positive impact on the Euro. On the contrary, a lower reading of inflation may lead, with all other factors being equal, to a devaluation of the common currency. However, since August has a calming effect and a consequent decrease in volumes traded, the reaction of investors to a news or event is more pronounced as it is exacerbated by the lack of liquidity. If this is the case, the reaction of the exchange market to events or the publication of economic indicators (such as inflation) will be more extreme and, by reflection, their impact on the stock markets will be greater.
On the last day of the month, the US market closed higher, this being also the trend of Wall Street in August. The session was marked by the release of some economic indicators, but the expectation was focused on the employment report that will only be known today.
Gold appreciated 0.95% while the Swiss Franc rose about 0.70% against the Dollar.
In the past, the reaction of financial markets to events related to North Korea was sometimes abrupt but always momentary. The reason for this pattern is that the incidents with this country were isolated and generally followed by some calming or at least by some impasse. However, the current situation has been characterized by a continuous series of events, each one being more tense than the previous one. It is in this uninterrupted accumulation of tension that the threat to the financial markets may lie. Another factor not to be excluded is the possibility that some unforeseeable incidents might occur that would oppose the North Korean and American or South Korean armed forces, which could precipitate the situation.
Although investors are focusing this week on the reopening of the Congress, the developments in the Korean situation, the ECB’s tomorrow meeting and the FED are remaing as elements in their decisions. At the sectoral level, the tourism and insurance sectors suffered losses due to the approach of Hurricane Irma to Florida, a few days after Hurricane Harvey. According to meteorologists, Hurricane Irma may be the strongest hurricane recorded in the Atlantic, with winds of 300 km / h. According to analysts’ projections, in an extreme scenario, the passage of the two hurricanes could cause damages of about 130,000 M.USD.
Shares of insurers, reinsurers and tour operators have again come under some pressure as analysts update their calculations of Hurricane Harvey’s damage and are trying to anticipate what hurricane Irma will cause in the Caribbean and in the southern US.
At the last meeting of the ECB, Mario Draghi appears to have fulfilled the twofold objective he had set himself: to prepare the market for a change in the asset purchase program without unduly alarmising investors. The ECB could decide on changes to the asset purchase program at the next meeting in October, avoiding requests for more information from journalists attending the press conference. To avoid a more pronounced market reaction, the ECB President reassured investors that “a very accommodative monetary policy is needed” to generate the desired inflation.
Asian markets closed higher, essentially for two reasons. The first is the generalized recovery of the Dollar against the region’s currencies. The second is that North Korea has not carried out any war test during the weekend. In the last 3 months, the Chinese stock exchange has been the best Asian performer, accumulating gains of 6%. Other Asian markets have been conditioned by tensions on the Korean Peninsula and the fluctuations of the respective currencies against the Dollar (which influence the competitiveness of their exports). The Chinese economy has behaved rather better than many economists anticipated a few months ago. Economic activity has given repeated signs of strength, grounded in the dynamism of infrastructure, the real estate market and exports. Chinese markets have also benefited from continued capital flows that continue to flow into emerging markets, of which China is the most representative.
In the last three months, the indices of the Old Continent registered a remarkable underperformance compared with their American counterparts. After the highs reached at the beginning of June, European stocks suffered a correction between 5% and 10% and in the last two months have consolidated over a wide range, without showing a definite trend. On Monday, some indices broke this high, increasing the likelihood of a short-term rally. This probability would be strengthened if the Euro corrected. Despite continuing to trade around 1.20 against the Dollar, the Euro has lost some momentum against other currencies, which deserves some vigilance from investors. The threats to this potential positive scenario for European equities are the situation in Korea and some hypothetical correction on Wall Street.
The Automobile Fair is still taking place in Frankfurt, the biggest event of this industry in Europe. This type of event is always a good opportunity to gauge not only the opinion of stakeholders but also their feelings about the current situation. After a first half of the year in which it has been strongly influenced by sales in the European continent (after six years of recovery), the automotive sector has been one of the best performers in the Old Continent in recent weeks.