The DAX index is down considerably in the Thursday session. Currently, the DAX is trading at 12,060.00, down 0.77% on the day. On the release front, it’s a second straight day without any German or Eurozone events. On Friday, both Germany and the US release CPI reports.
With a lack of European economic data this week, investors are focusing on political risk, which continues to rise over tensions between the US and North Korea. As the war of rhetoric between the two countries has escalated, investors have dumped shares in favor of safe-haven assets, such as gold. North Korea has vowed to retaliate over new sanctions imposed by Washington and has threatened to attack Guam, which is a major US military base. President Donald Trump is taking a tough line on North Korea, and has promised that any aggression from North Korea will be met with “fire and fury.” With Trump and North Korean President Kim Jong-un on a possible collision course, the stock market slide could continue.
Low inflation levels remain a major headache for ECB policymakers. Inflation in the eurozone stood at 1.3% year-on-year in July, well below the bank’s inflation target of 2%. Even Germany, whose economy is very strong, is grappling with weak inflation. The ECB’s ultra-accommodative policy, which includes interest rates of 0.00% and asset purchases (QE) of 60 billion euros/month, has failed to push inflation upwards. The QE program, which is scheduled to terminate in December, is coming under closer scrutiny. However, December should not be treated as a drop-dead date – the ECB has been careful to state that QE could be extended “if necessary”. The ECB holds its next policy meeting in September 7, and there is a strong possibility that the bank will make an announcement regarding tapering QE, which could start in early 2018. The dilemma facing policymakers is that despite a stronger labor market and improved growth, which would suggest that a tighter monetary might be appropriate, inflation levels remain stubbornly low, as the ECB’s inflation target of 2% has proven overly optimistic. The ECB is well aware that any talk of tighter policy could send the euro higher, as was the case in June, when investors snapped up euros after Mario Draghi made some hawkish comments at a meeting of central bankers. As far as interest rate moves, the ECB is unlikely to raise rates until its tapering process is well under way, meaning we’re unlikely to see any rate moves before the second half of 2018.
What does the Fed have planned in the second half of 2017? The markets are looking for some clarity from the Federal Reserve, which is showing signs of backtracking on another rate hike in 2017. Earlier this year, the Fed strongly hinted that it planned to raise rates three times in this year, but so far only pressed the rate trigger twice, in March and June. After the June hike, Fed Chair Janet Yellen shrugged off concerns over low inflation, saying that it was due to “transient” factors. However, inflation has not improved and the Fed has changed its tune. Last week, St. Louis Federal Reserve President James Bullard said he opposed further Fed hikes, warning that another hike would actually delay inflation from hitting the Fed’s target of 2%. The Fed appears uncertain about when to raise rates, and predictably, this hesitancy is making investors skeptical that the Fed will act. There is little chance that the Fed will make any moves at the September and November meetings, and the odds of a rate hike in December are currently at 42%. Analysts are hoping for some insight into the Fed’s thinking when the Fed Reserve Dallas President Robert Kaplan and Minneapolis President Neel Kashkari deliver speeches on Friday.
