September 5, 2017

Markets Today: While my risk position gently weeps

There are plenty of news stories about the muted reaction from markets to the latest escalation on the Korean peninsula.

The AUD dipped ever so briefly at the open yesterday but even that modest move was short-lived and rather slight in magnitude.  How indeed to price catastrophe?  It’s certainly not as if the risk has gone away.  As Phil Dobbie, our host on The Morning Call podcast mentioned this morning, the potential consequences are abhorrent.  It just doesn’t bear thinking about. (If you don’t get link to listen to The Morning Call and would like to, email me.)

The war of strong words over events in North Korea continues. There are calls for the UN Security Council to invoke yet more sanctions, a process that has been going on since 2006 when North Korea detonated its first nuclear device.  The US Administration is floating the idea of the US not dealing with any country that deals with North Korea.  German Chancellor Merkel and President Trump in a call overnight condemned the test noting it was a “new and unacceptable escalation by the North Korean regime”.  US UN Ambassador Haley told the UN Security Council “enough is enough” and that North Korea is “begging for war”. US Defence Secretary Mattis spoke of a “massive military response” if needed.  South Korea is warning that the North is preparing to launch more missiles.  China has warned North Korea against launching another missile but regards the Trump Administration threat of tougher trade sanctions as “unacceptable”.  The Chinese UN Ambassador is calling for a peaceful resolution.  As they say, the situation remains fluid.

And yet “risk off” sentiment has hardly become evident.  Moves back to “safe haven/risk off” currencies, the Japanese yen and the Swiss Franc, have been very much at the margin, the AUD suffering very little to no collateral damage.  Dr Copper, one of the best barometers of actual and prospective momentum in the global economy, is higher again overnight, by 1.20%, continuing on its run higher with other base metals, though Ally gave back some ground overnight.  The Korean KOSPI opened 2% lower yesterday, closing down 1.2%.  For those that like history, the Dow fell less than 1% in the week the Cuban missile crisis was at its most tense but then rallied after.

US energy markets look to be moving toward normality.  Seven Gulf refineries (accounting for 8% of US capacity) are beginning to reboot and come back on line.  Gasoline futures are now beginning to steady and WTI is somewhat higher.

There’s been little to no data of note overnight, with only the EC Sentix Investor Confidence survey for September and the UK PMI Construction index for August.  The Investor Survey rose while the UK index dipped, but at 51.1 is the lowest for a year, if still in growth territory.  With US markets closed for the Labor Day holiday, European equities were lower, following yesterday’s APAC lead.  Bond yields inched lower, Germany’s 10y by 1.3bps and the French yield by 0.5bps.

Coming up

First up this morning there’s a smattering of indicators: NZ Q2 Building Work Done, a quarterly pre-GDP partial, the AU AiG PSI Services index, weekly AU Consumer Confidence, the Nikkei PMI Services/ Composite indexes for Japan and NZ’s ANZ Commodity Price Index.  But there’ll likely be greater interest in the 11.30 AU Balance of Payments and Government spending estimates that’ll play into another re-think of likely GDP out tomorrow.  NAB’s pick is net exports as a zero net contributor to growth, but government spending growing 0.5%, providing some support to growth.

Then the market will be in RBA mode with the post-Board statement at 2.30 (no change is priced), with the market interested in any material changes in the Bank’s reading of the economy and outlook.  Specifically, their latest thinking on Q2 growth after recent partials (any update of Q2 1¾% year ended growth from the August SoMP?; probably not), an improving labour market, improving business conditions, the consumer and housing risks.  They dialled up their anxiety a touch last month over household leverage, noting that housing credit continued growing faster than incomes.

The AUD/USD is virtually unchanged from when the RBA last met, 0.80 their technical assumption in their August SoMP forecast.

This week’s US trading gets underway tonight.  The US Congress resumes with the after effects of Harvey, the debt ceiling, tax policy and the Budget all to address, some more urgently than others, and North Korea.  There are two Fed speakers tonight, Fed Governor Lael Brainard, a very thoughtful observer of the economy.  When she last spoke on economy and monetary policy she noted that the Fed’s long-run miss of its inflation goal undermines the rate hike case.  One could imagine that recent data has only solidified that view.  Minneapolis Fed President Neel Kashkari is also speaking.  He’s a voter on the FOMC this year and generally batting back against calls for haste on hiking rates further.

There’s another GDT dairy auction again tonight, our BNZ colleagues expecting a small fall in world currency terms.


US markets were closed for Labor Day; European equities eased. In commodities, Brent crude oil -0.78% to $52.34, gold+0.7% to $1,336, iron ore -1.3% to $77.86, steam coal +1.1% to $96.90, met. coal +0.0% to $207.00. AUD is at 0.7945 and the range since yesterday 5pm Sydney time is 0.7935 to 0.7973.

Good luck.

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