Risk-off vibes kicked into high gear as the New York session rolled along and traders got wind of headlines on a fresh batch of threats from North Korea. Political uncertainty also seems to be a common theme to start the week thanks to Japan’s snap elections and the recent poll results in Germany and New Zealand.
- ECB head Draghi: EUR gains partly reflect improved confidence, political situation
- Draghi: Downside risks to region are mostly political in nature
- FOMC member Evans: Need to see clear signs of higher price levels before hiking
- Evans: Gradual and cautious approach is the appropriate strategy
- Evans: Policy misstep would further delay achieving 2% inflation
- FOMC member Dudley: Inflation risks are fading
- Dudley: Fundamentals support more expansion, U.S. economy in a good place
The return of North Korean jitters
Strong words from Pyongyang dominated the headlines for the most part of the U.S. session and weighed heavily on risk appetite. In response to Trump’s latest tweets and remarks in the U.N. gathering, North Korean foreign minister Ri Yong Ho warned that the Donald’s threats amount to a declaration of war.
Talking to reporters during the U.N. General Assembly in New York, the North Korean official declared:
“The whole world should clearly remember it was the U.S. who first declared war on our country.”
Furthermore, he mentioned that they have every right to take countermeasures, which could include shooting down U.S. bomber planes even if these are not in North Korean airspace. Over the weekend, U.S. military had a show of force over the Demilitarized Zone separating North and South Korea, keeping tensions heightened.
Of course White House officials scrambled to mop up the latest mess as Press Secretary (Who is it these days? It’s been hard to keep up. Sean Spicer? Melissa McCarthy?) Sarah Sanders clarified that it has not declared war on North Korea, saying that the claim is absurd.
The war of words between the two nations has been going on for quite some time but appears to be escalating lately, which led several market participants to think that it’s only a matter of when or a question of who fires the first salvo.
U.S. equities turned lower on these reports while gold advanced:
- Dow 30 index is down 53.50 points to 22,296.o9 (-0.24%)
- S&P 500 index is down 5.56 points to 2,496.66 (-0.22%)
- Nasdaq is down 56.33 points to 6,370.59 (-0.88%)
- Gold is up to $1,313.61 per troy ounce (+1.24%)
Political uncertainties abound
With Japanese PM Abe’s recent call for snap elections and the official results coming in from the euro zone and New Zealand’s polls, traders are starting to get a sense of political uncertainty returning to the markets.
To recap quickly, New Zealand’s elections resulted in a victory for the National Party, which should’ve been a bullish scenario for the Kiwi had they been able to get enough votes to guarantee a majority. In Germany, Merkel also scored a victory but this was clouded by the rising popularity of the far-right AfD. Over in Japan, Abe is seeking fresh mandate to respond to North Korea’s threats by dissolving parliament. And that’s what you missed on Glee!
For the newbies out there, this kind of political limbo usually takes its toll on economic confidence, so you can imagine how this triple-whammy case could keep a lid on global risk-taking until some clarity is restored.
Mixed views from FOMC members
Not all Fed officials are feelin’ the love for tightening as the recent speeches highlighted mixed views among committee members. While FOMC member Dudley acknowledged that U.S. fundamentals support more expansion and that inflation could soon stabilize at their 2% target, FOMC member Evans was less optimistic as he pointed out that a policy misstep would pull them farther from this inflation goal.
Evans mentioned that the central bank should wait for clear signs that price levels and wages are picking up before increasing rates again, adding that a gradual and cautious approach remains an appropriate strategy. He said:
“We should avoid taking policy steps that could be misread as a lack of concern over the inflation outlook. In my view, that would be a policy misstep that would further delay achieving our inflation objective.”
FOMC member Kashkari still has a speech coming up in a few hours as of this writing and we all know where he stands in terms of his monetary policy bias.
Major Market Mover(s):
The Kiwi seemed most vulnerable of the bunch as it reeled from the political limbo in New Zealand and the return in risk-off vibes. Traders are likely pricing in downbeat expectations for the RBNZ statement later this week as well.
NZD/JPY is down to 81.07 (-1.11%), NZD/CHF tumbled to .7017 (-1.34%), NZD/USD fell to a low of .7252 (-1.08%), and NZD/CAD is down to .8985 (-0.78%)
JPY & CHF
The yen and franc have been the main beneficiaries of the risk-off flows so far, with the former shrugging off uncertainty from the snap elections and the latter no longer as worried about SNB intervention as it used to be.
AUD/JPY dropped to 88.63 (-0.57%), CAD/JPY slipped from 90.92 to 90.23 (-0.57%), GBP/JPY fell to 150.41 (-0.50%), AUD/CHF is down 45 pips to .7671 (-0.58%), and GBP/CHF dropped to a low of 1.2954 (-0.51%).
Watch Out For:
- 10:45 pm GMT: New Zealand trade balance (825M NZD deficit expected, 85M NZD surplus previous)
- 11:30 pm GMT: FOMC member Kashkari’s speech
- 12:50 am GMT: BOJ monetary policy meeting minutes (Review their latest decision here)
- 1:00 am GMT: New Zealand ANZ business confidence index (18.3 previous)