Geopolitical Tensions Remain Elevated into the Weekend

<br /> Geopolitical Tensions Remain Elevated into the Weekend – Marc to Market<br />


There has been no apparent attempt by either North Korea or the
United States to ease the rhetorical flourishes that have made global investors
assets were liquidated, and the funding currencies, particularly the
Japanese yen and Swiss franc were bought
back.  The yen gained nearly 1.6% this week, ahead of the US session,
while the Swiss franc gained 1.3%. Gold is edging higher today, for the fourth
consecutive session, and 2.4% for the week to reach levels not seen in two months.  
South Korean equities fell
1.7% today to bring the loss for the week to 3.2%. 
  Tokyo markets were closed today for
a public holiday, and the MSCI Asia
Pacific excluding Japan fell 1.5% and 2.4% for the week.   MSCI emerging
market equity index also lost 2.4% this week to snap a four-week advance.
The Korean won eased less
than 0.2% today, which brought the weekly loss to 1.6%.  
It eclipsed the Philippine peso as the
weakest in Asia but a couple of
hundredths of a percent.  After the yen, the Chinese yuan was the
strongest in the region, gaining almost 1%.  
The downward pressure on US
yields, with the 10-year slipping to 2.18%, nearly a two-month low, coupled
drop in equities helped underpin the Japanese yen. 
 The dollar traded below JPY109 for
the first time since the middle of June.  The greenback could not get back
above JPY109.30. There is a large ($1.6 bln) option struck at JPY109 that
expires in NY today.  
The euro is sidelined.  It has largely been confined today
to a quarter cent range above $1.1750.  It finished last week near
$1.1780.  Its four-week advance is at risk.  There are chunky euro
options that expire before the weekend.  At $1.17 there are 1.2 bln euro options that will be cut today,
and nearly 1.7 bln euros struck at $1.1755-$1.1765.  
Market participants are
likely to remain anxious about the geopolitical developments into the
anxiety may overshadow the last economic highlight of the week:  US CPI.
 Headline CPI (year-over-year) is expected to rise for the first time
since February (1.8% vs.1.6%).  Most expect the core rate to remain
unchanged at 1.7% for the third consecutive month.  If there is a
surprise, we suspect it is to the upside of the core rate, perhaps encouraged
by the uptick in the medical services component of the PPI (released yesterday)
that feeds into the CPI.  
NY Fed Dudley’s comments
yesterday did not address specifics about monetary policy. 
However, his broad-stroke characterization
of the economy leaves little doubt that the Fed’s leadership is on track to
announce next month the start of its gradual balance sheet operations.  
The resilience of the US economy was recognized, and despite the weakness in
prices in H1, Dudley, like other Fed officials, continue to expect inflation to
rise toward its medium-term target.  The FOMC minutes from last month’s meeting will be
reported next week.  We expect the concern about the lack of price
pressures was shared and that there is no
urgency to hike in September.  Instead, by beginning the balance sheet
operations, the FOMC buys time to monitor prices going forward.  We
continue to think the odds of a December move are more than 50/50 for which the
market is pricing in about a 1 in 3 chance.  
The dollar-bloc currencies
have fallen out of favor. 
 It is not just about unwinding of risk due to the
geopolitical concerns.  In New Zealand, the central bank’s rhetoric
protesting the currency’s strength was turned
up a notch.  In Australia, the central bank governor also made it clear
that there was no rush to tighten monetary policy.  His message was one of
patience.  The Canadian dollar fell every day last week and in three of
this week’s five sessions.  It is nearly flat in today’s activity.  This is the second consecutive weekly decline,
which followed a seven-week rally in eight weeks.  

The September light sweet
crude oil futures contracted posted a large outside down day yesterday, by
trading on both sides of the previous day’s range and closing below that
market again rejects the $50 a barrel
level.  Many are skeptical about OPEC’s discipline and today’s IEA report
illustrates why.  The IEA estimates that the 22 countries bound by the
agreement produced 470k barrels a day in July above the quotas.  Global
output is nearly 500k barrels a day above last July.  Meanwhile, Brent
prices have moved into backwardation, which means that front month contracts
sell for more than the deferred months.  October is the front-month Brent
oil contract.  The price of Oct Brent is above the price of contracts out
until May 2018.   It is the first time the price of the front month
contract is above the first deferred
contract in nearly 16 months. If it is sustained,
it will be seen as a sign that the oil
market is re-balancing.  


Geopolitical Tensions Remain Elevated into the Weekend
Geopolitical Tensions Remain Elevated into the Weekend

Reviewed by Marc Chandler

August 11, 2017

Rating: 5

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