EUROPE MARKETS: European Stocks Slide After US And North Korea Cross Swords

Paterniano Del Favero
Agosto 15, 2017

Risk off sentiment was broadly pervasive through the currency markets especially with European stocks set to follow Asia's lead lower with major index futures indicating a 0.5 to 0.8 percent decline.

USA producer prices unexpectedly recorded their biggest drop in almost a year, and the number of Americans filing for unemployment benefits unexpectedly rose last week.

The pound has slipped by 0.1 percent versus the dollar, but has gained 0.1 percent against the euro.

The yen tends to benefit during times of geopolitical or financial stress as Japan is the world's biggest creditor nation and there is an assumption that Japanese investors there will repatriate funds should a crisis materialize.

South Korea's KOSPI fell 1.8 per cent to an 11-1/2-week low, but its losses for the week are a relatively modest 3.2 percent.

I don't think it's going to be business as usual on Wednesday because of the overhang from the possibility of an escalation of the tension between the United States and North Korea.

A spokesman for the Korean People's Army said in a statement that it was "carefully examining" plans for a missile attack on the U.S. Pacific territory, which has a large American military base. Trump warned that the North would be met "with fire and fury".

With the rhetoric rumbling on, Europe's top-rated German bond yield held near six-week lows.

"This was the case for US equities during the 1962 Cuban missile crisis, when the world arguably came closest to outright conflict between two nuclear-armed powers", Jones said.

The yield on the 10-year Treasury bond fell to 2.2% and is approaching its lowest level of the year.

"We would now be careful with a whiff of risk aversion in the air and, by extension, also stay away from shorts in the rates market", RBC's global macro strategist Peter Schaffrik said.

The CBOE Volatility Index, the most widely followed barometer of expected near-term US stock market volatility, hit its highest mark since November 8, when Trump was elected president. If nothing else, the rhetorical response from Trump and the rest of Washington against North Korea has been forceful and swift, although a diplomatic solution to the persistent Korea problem has always been the most desirable outcome. The concern here is that an event that causes a strong pickup in market angst and risk aversion could, in theory, see the numerous rules dictating a reversal of these positions in a very short space of time, which could exasperate the move.

The dollar was further weighed Friday by the soft USA inflation data.

Benchmark U.S. crude fell 97 cents United States, or 2%, to US$48.59 a barrel on the New York Mercantile Exchange.

Early in the session, the dollar was supported by a report that showed USA job openings surged to a record high in June.

Despite the ongoing turmoil, investors' focus was slowly returning to the U.S. economy after Chicago Federal Reserve president Charles Evans said Wednesday it would be "reasonable" to announce the beginning of a reduction of the Fed's balance sheet next month.

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