- Tensions around North Korea impacting the equity markets
- Euro-dollar suffer from profit taking
- Vix still sleeping
Heightened geopolitical uncertainty isn’t something which is making the headlines for the first time, therefore, the dust created by this does settle more rapidly. This is reflected in the equity market today (the futures are trading higher for the FTSE). In the latest war of words between the US and North Korea, the officials from North Korean Peninsula have played down the fear of a full-blown nuclear war. "Load of nonsense" is the phrase which could stimulate some bargain hunters to step back, especially if Donald Trump sees the underlying message of cease fire here.
The intense situation ducked investors from jumping into a full risk-on mode and this helped the yellow metal to score more gains. The momentum would remain strong as long as the rhetorical brinkmanship between President Trump and North Korea does not come to an end. The VIX index failed to show any signs of explosions yesterday and with easing tension, we would expect the index to go further into the sleep mode today. Perhaps, more unconventional presidential comments are something which has become the new norm for the markets.
Back in the Eurozone, the Euro-dollar pair is suffering from profit taking as larger long bets are unwinding. The currency has surged nearly 13 percent against the dollar so far this year and this makes it best-performing currency the major currency. But the strength of the darling currency would be worrisome for the ECB hence investors are quick in taking some chips off the table. Mario Draghi has been fighting an uphill battle with inflation and a stronger euro will not only impact the imports of the Eurozone but it would also suppress the inflation and the ECB simply cannot let that happen. The Jackson Hall event is not far and it is widely expected that Mario Draghi will lay down the initial sketch for winding down the monetary policy. Remember that the bank will still be purchasing the bonds but just at a slower pace. Therefore, the size of the ECB balance sheet would still continue to increase while the Fed would be in a process of reducing their balance sheet
Over in Asia, the economic data out of Japan was simply rotten. Look at the core orders, they literally took a nose dive and fell 1.9 percent when the forecast was for an increase of 3.7 percent. This is not a great thing for the BOJ and for the Japanese yen. We have three consecutive fall in this number and it should the ring alarm bells for the central bank.
For Sterling traders, the focus is solely on the latest manufacturing and Industrial production number. The forecast for today is rather optimistic and the ONS numbers have been consistently adverse but if you look at the independent surveys, they are more optimistic. Industrial production, construction output and trade balance, all of them are expected to improve and this set the stage for disappointment.
Oil traders celebrated the crude inventory data which showed the longest week of back to back declines since May. Compliance is the vital issue for OPEC and traders are going to remain focused on it. We are far from being out of the woods and the oil market is going to remain in and out of positive territory unless there is a clear evidence that the demand and supply equation is close to equilibrium. From a technical perspective, we are stuck in a narrow range and only a break of $50 would confirm a new trend.