The background hum of escalation concerns on the Korean peninsula appears to be the dominating force behind current investor sentiment at this time. US markets returned from their long weekend break and instead of bucking the bearish tone from Europe on Monday, they appear to have continued it, closing sharply lower.
Despite yesterday’s losses, the price falls still remained modest with both the Dow and S&P500 remaining well above their August lows.
The decision by the US to allow the upgrade of the payloads on South Korea’s warhead defences, while sensible given the threats from its noisy neighbour, seem sure to elicit some form of counter response in the coming days, probably on September 9th when North Korea celebrates its founding day, and this uncertainty is likely to weigh on market sentiment over the rest of the week.
While equity markets struggled, the move into havens continued with gold prices hitting a one year high, while the Swiss franc also gained further ground.
US treasuries also had a strong day, sending 10 year yields to their lowest levels this year, though some of these gains were helped by some dovish remarks from permanent Fed governor Lael Brainard as she expressed caution about the need for further rate rises, though she came across as more sanguine about when the balance sheet run off program would get under way.
Her comments were taken as confirmation that the FOMC was more than a little concerned about the trajectory for inflation, and when the damage caused by storm Harvey is added to the equation, along with concerns about the approach of another tropical storm/hurricane, Irma, it would appear that the prospect of another rate rise this year continues to recede, putting the US dollar back under pressure.
On the data front in the wake of last week’s US payrolls report we will get a look at the latest ISM services data for August, with the employment component likely to be of particular interest. Friday’s ISM manufacturing number had a really solid employment element, which was a bit of a surprise given the weakness of the payrolls number 90 minutes before.
We also have the Fed’s Beige book survey of economic conditions around the 12 Fed regions which is expected to paint a fairly decent picture of economic activity across the country.
Away from the US we also have a Bank of Canada rate decision in the wake of the recent decision by the bank to push rates up at its previous meeting. Markets are expecting another rate move of 25 basis points in the coming weeks given the strength of recent data in terms of GDP and jobs growth.
Some have speculated it might happen today, and given the data there is no reason to suppose it won’t, however it is more likely that the move could well come next month after central bank officials have had time to assess the effects of the previous rate move which took place in July. As such a move today would be a surprise.
EURUSD – the risk of a short term peak remains while below the 1.2000 level. A break below the 1.1820 level argues for a move towards the 1.1600 area. Above 1.2000 retargets the 1.2070 peaks.
GBPUSD – currently finding resistance up near the 1.3040 area with the risk we could well see further gains towards 1.3140 as well as the August peaks at 1.3268. Support now comes in at the 1.2980 area and below that at the 1.2850 area.
EURGBP – pressure remains on the downside while below the 0.9220 area with the risk of a move towards the 0.9040 area. It would take a move back through the 0.9230 area to stabilise and retarget the 0.9300 area.
USDJPY – support still remains down near the 108.20 area for now and the August and April lows and this is currently containing the downside. Rebounds need to get back above the 111.00 area, otherwise we remain at risk of a move towards the 106.80 area.
FTSE100 is expected to open 23 points lower at 7,350
DAX is expected to open 45 points lower at 12,078
CAC40 is expected to open 26 points lower at 5,060
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