Originally published by AxiTrader
Market Summary
Markets will react violently if a military conflict erupts on the Korean Peninsula. But for now traders and investors are taking the approach that there will be no escalation beyond words.
That’s the clear message that we can take away from the first day’s trade for the week. Yes risk aversion has risen – stocks were a bit lower in Asia and Europe, the yen is a little stronger, gold caught a mild bid and the Australian dollar came under a little – but not too much – pressure.
So with US markets mostly out overnight it’s clear traders are betting that things will de-escalate, rather than escalate. I hope so but I’m not sure when I take into account what the South Koreans have said and done, that Nikki Haley, the United States Ambassador to the UN, said the North Koreans are begging for war, or that the Russian ambassador said words haven’t worked so far.
Anyway as we head into Tuesday here in Asia trade the euro is at 1.1900, USD/JPY is at 109.64, and the Aussie dollar is at 0.7945. Gold is at $1,334, USD/KRW at 1131, and WTI is at $47.37.
None of those changes are more than 1% from Friday night’s close.
Likewise European stocks fell around 0.33% in London, Paris, and Frankfurt. So after a 22 point, 0.39%, fall yesterday for the ASX 200 SPI traders have added an optimistic 12 points in overnight trade.
On the docket today we have the AiGroup’s services PMI and the ABS quarterly current account balance for Australia. The RBA decision is announced at 2.30pm AEST and then governor Lowe is up again with a speech at 5.10pm. Offshore we get a raft of services PMI across the globe, EU retail sales, a speech by Fed governor Lael Brainard, along with US factory orders.
Here's What I Picked Up (with a little more detail and a few charts)
International
- I hope for a positive resolution on the Korean Peninsula but even though markets are fairly calm tensions is escalating materially and it might be the South traders need to watch. I say that because they are the ones who will bear the brunt of any outbreak of hostilities on the Peninsula so it’s not beyond the realms of possibility that they feel they need to strike first. This is something the game theorists will be working through I’m sure.
- Anyway, that’s just a hypothesis from me that this is about more than just the US, DPRK, and China. Here are some interesting comments I picked up in my research overnight which highlight this.
- At the UN Security Council meeting overnight US Ambassador Nikki Haley said Kim Jong-un is “begging for war”. She reiterated Defence Secretary Mattis approach saying “war is never something the United States wants. We don't want it now. But our country's patience is not unlimited. We will defend our allies and our territory," Haley said.
- Haley then added that trade sanctions on those who do trade with Pyongyang are in the pipe. "The United States will look at every country that does business with North Korea as a country that is giving aid to their reckless and dangerous nuclear intentions," she said.
- But Haley highlighted the calls from China and Russia for the US and South Korea to back off was “insulting”. Haley told the Security Council that (my bolding) "the idea that some have suggested of a so-called freeze-for-freeze is insulting. When a rogue regime has a nuclear weapon and an ICBM (intercontinental ballistic missile) pointed at you, you do not take steps to lower your guard. No one would do that. We certainly won't."
- Chinese Ambassador Liu Jieyi said “China will never allow chaos and war on the (Korean) Peninsula”.
- But Russian Ambassador Vassily Nebenzia intimated some sort of military response noting that “sanctions alone will not help solve the issue”.
- South Korea is working with the US Jang Kyoung-soo, acting deputy minister of national defence policy, told a parliament yesterday and was seeking the deployment of “strategic assets like aircraft carriers and strategic bombers”. He also said “We have continued to see signs of possibly more ballistic missile launches. We also forecast North Korea could fire an intercontinental ballistic missile” which is where the risk arises from the South. South Korean President Moon Jae-in and US President Trump have agreed to scrap the warhead weight limit on South Korean missiles which, Reuters reports, “would enable the South to strike North Korea with greater force in the event of a conflict”. Kim Jong-un isn’t the only one being cornered here (although he is putting himself in that position) the South is the collateral damage of any conflict.
- None of that is to say I know how this will play out. Rather it is to highlight the tensions has risen materially. The players are all very edgy and the risk of a mistake or misstep are high. No wonder Australian Prime Minister Malcolm Turnbull is saying risk of war on the Korean Peninsula has reached its greatest level in 60 years.
- As a trader it means I want some Swiss franc, gold, and volatility optionality in my portfolio.
Moving on now:
- EU investor sentiment rose this month the latest Sentix survey showed. The print of 28.2 was higher than 27.7 in August and better than the market’s forecasts of 27.4. Also in the EU, Reuters reports German exporters aren’t fazed by the strength of the Euro. Anton Boerner, president of the BGA trade and wholesale association told Reuters that “We're totally relaxed about the euro's current strength. Neither the speed nor the extent worry us”. Boerner did however note that exporters in neighbouring countries might have a different view.
Australia
- The market found support where it should have yesterday in the 5685/5700 region I identified before it rose a little to finish the day at 5,702, down 22 points. SPI traders are more optimistic this morning having added 12 points overnight.
- Here’s one for SPI traders. The big 5 banks make up more than 25% of the ASX 200 market capitalisation. As a result even macro traders like me need to figure out what I think they’ll do because of the impact that will then have on the index. So it’s worth noting the pressure the big banks and financials came under again yesterday. But longer term the reason I raise this is because of an article I saw in the AFR yesterday.
- The article quoted the thoughts of ASIC boss Greg Medcraft and suggested he sees an existential threat to banks as we know them in the years ahead. The article said, “Bank accounts could become unnecessary within the next decade because central banks will create digital currencies and allow customers to hold deposits directly with them, predicts Greg Medcraft, chairman of the Australian Securities and Investments Commission. The issuance by central banks of digital versions of their fiat currencies onto distributed ledgers would lead to widespread disaggregation for commercial banks, which would be forced to fight much harder to attract funding alongside market-based funds in a radical upheaval of financial markets”.
- Naturally, as Medcraft said, “the smart banks get it and are reshaping what they do”. But he added “they know they are probably living on borrowed time”. He went further to say “I think you will see a disaggregation of the banking model down to a narrow banking model”.
- I’m not one of the smart ones. I didn’t know about this. And although it may not impact the overall level of the SPI or S&P/ASX 200 index today, tomorrow, or even soon it’s a big macro trend I need to investigate. The implications are a continued underperformance of the ASX to the S&P 500.
- Today is RBA day and I’m expecting a pretty upbeat statement from governor Lowe at 2.30pm AEST this afternoon. We’ll also get the last of the partials so we can have a decent guess at what tomorrow’s Q2 GDP print will be. Yesterday’s company profits and inventories was a little lower than thought. One thing it did show was the lack of pricing power of labour as a bigger share of the pie is going to companies.
Forex
- Not a lot of movement against the US dollar since the initial moves yesterday morning. Certainly, the yen and Swiss buying, as well as the Aussie selling, abated as the morning wore on. On that basis it seems reasonable to conclude that traders appear to be cautious but expectant of a non-military resolution of the North Korean issue. I hope so too. But I have no way of knowing. Jim Jong-un has a very different playbook to the one usually used by world leaders.
- So this morning we have the euro at 1.1900 up 0.37%. GBP/USD is off a little at 1.2926, down 0.16%. That’s seen EUR/GBP bounce of the mid-Bollinger band support and it’s at 0.9202 this morning.
- USD/JPY is sitting at 109.63 down 0.56% while the Swiss franc is sitting at 0.9580 down 0.67%. IT makes a little more sense given the specifics of this situation that the Swissie outperforms the yen right now. That may change if USD/JPY breaks the range lows however.
- On the commodity bloc the Canadian dollar is a little weaker with USD/CAD back above 1.24 at 1.2410 up 0.15%. The kiwi is higher at 0.7165, up 0.15% while the Aussie is down 0.3% at 0.7944.
Commodities
- Gold is up 0.73% at $1,334 after a high around $1339 yesterday. The technical still suggest an eventual move toward $1,360/65 even though gold is overbouoght and outside the Bollinger Bands right now.
- Oil was a little higher as Iran said OPEC compliance is improving and as the US continues to recover from Hurricane Harvey’s wrath. Hurricane Irma is next off the block but she has Florida in her sites. WTI is at $47.37 and Brent is at $52.20.
- Copper had a huge day yesterday. Indeed metals had a huge day in Shanghai with nickel reaching a two year high during trade. At $3.13 a pound copper has exceeded the technical targets but remains supported by positivity about the Chinese economy and a strong trend.
Have a great day's trading.