Markets Today: Geopolitical poker face

Geopolitical tensions surrounding North Korea dominated the overnight session. However, market moves were contained following a winding back in rhetoric by US Administration officials.

By

In this high stakes geopolitical poker round it appears both players were ‘playing the board’ and a ratcheting down of tensions appears to have occurred – inspiration for today’s title, Poker Face.

Although risk aversion was felt in Europe, the toning down of language saw a recovery in the US. This is probably best seen in equities with the EuroStox down 1.3%, but the S&P500 closing to be broadly unchanged. Risk haven currencies were bid, with the CHF +1.1% and Yen +0.2%, though the US dollar (DXY) was broadly unchanged. Gold was up 1.7%, while the VIX hit a still low 11.11.

As for the rhetoric, North Korea responded to Trump’s “fire and fury like the world has never seen” statement by stating North Korea could “send a serious warning signal to the US” by considering bombing Guam. US Administration officials have since toned down the language and described Trump’s language as “impromptu” while Secretary Tillerson played down any prospect of military action. This was seemingly confirmed by President Trump, who tweeted “hopefully we will never have to use this power, but there will never be a time that we are not the most powerful nation in the world”.

US Treasury yields fell 1.4bps to 2.25%. They were initially down to 2.2085%, but the toning down in geopolitical rhetoric along with a weak 10-year note auction saw some retracement. There was no clear factor for the weak 10-year auction (bid-to-cover ratio 2.23% vs 2.45% previously), but it could be bonds are looking expensive given the likely start of the Fed’s balance sheet unwind in September and a labour market that continues to tighten which lends support to further Fed rate hikes.

The Fed’s Evans (voter, dovish) was out overnight, lending his support for the Fed to begin trimming its balance sheet in September, describing the timing “as quite reasonable…even with the potentially temporarily lower inflation data”. As for the next Fed rate hike, Evans said he believes waiting until December would give the Fed time to assess whether inflation will resume moving toward the Fed’s 2% target.

US data was very scant with only Productivity and Unit Labor Costs. Productivity was better than expected, up 09% (0.7% expected), but Unit Labour Costs were worse than expected a 0.6% (1.1% expected). There was little development on resolving the debt ceiling, though some reports suggest the US government could run out of funding on the 3rd of October. The base case remains that a temporary funding measure for 2-3months will be implemented before then.

As we go to print the RBNZ kept rates on hold. The interest rate track was unchanged with the first rate hike still expected in late 2019. In Governor Wheeler’s last innings as Governor, the most significant changes in the post meeting statement were on the currency:  a lower NZD is “needed” as opposed to “would help” more balance growth and on inflation with the “outlook for tradable inflation remains weak”. The RBNZ consequently lowered its short-term inflation outlook and reinforces the likelihood of the RBNZ being on hold for some time. The Kiwi jumped on the news but is now only 0.2% higher following.

In commodities, WTI Oil rose 1.1% to $49.70. Geopolitical tensions have traditionally supported the oil given most of these incidences have occurred in the Middle East. Oil itself is caught between Statements by OPEC cutting production and rising supplies. It’s worth noting that Saudi Arabia and Iran hold a press conference on oil today.

Postscript: an apology to those who wanted a Glen Campell song. The Rhinestone Cowboy passed away yesterday at 81. He is gone but not forgotten.

Coming Up

RBNZ Governor Wheeler gives his final news conference on the policy statement (8.00am AEST) with markets attentive to any changes in nuance.

Domestically we get consumer inflation expectations. While normally second-tier it is worth tracking given expectations rose in July on the back of higher power prices to be back to long-run average level of 4.4%. If higher inflation expectations persist, it should help move core inflation back towards the RBA’s 2-3% target band.

Internationally focus will be on remarks by the Fed’s Dudley who is speaking on “regional wage inequality” with Q&A following. Dudley is a key figure on the FOMC and is likely to be pressed on the likelihood of wages and inflation picking up.

Other international touch points are mostly second-tier, including UK Industrial Production and Trade Balance, while in the US there is the usual weekly Jobless Claims.

Overnight

On global stock markets, the S&P 500 was -0.04%. Bond markets saw US 10-years -1.43bp to 2.25%. In commodities, Brent crude oil +1.23% to $52.78, gold+1.7% to $1,277, iron ore +0.0% to $75.46, steam coal +1.2% to $95.20, met. coal -0.3% to $193.50. AUD is at 0.7889 and the range since yesterday 5pm Sydney time is 0.7855 to 0.7915.

For full analysis, download report

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets