Brinkmanship [Video]

The Day So Far…

A calm start to proceedings as the dust settles on the flight-to-quality bid seen late yesterday following the elevation in aggression from North Korean. Since then cooler heads have prevailed and the White House has since issued a statement stating that it has not declared war and did not want conflict with North Korea. Despite this the risks are still apparent and yesterday’s $15 move in gold was a clear example that market psychology can quickly turn in an otherwise quiet market place. To me the most disturbing part of this development is that options other than real action are quickly running out and although the possibility of physical confrontation is minimal risks still remain.

Elsewhere, oil has been a talking point after Brent rose to its highest in two-years yesterday, with the 50DMA moving above the 200DMA (golden cross) for the first time since last summer. The catalyst for the rise was a threat from Turkey to shutdown Kurdish oil shipments through its territory but underlying the recent rise in crude oil is growing consensus that prices could squeeze higher in 2018 due to the emergence of a supply gap. This view has been epitomised by analysts at Citi who note that five influential countries within OPEC; Libya, Nigeria, Venezuela, Iran and Iraq, may have already reached their maximum capacity levels. This of course comes in the context of an improving global economic backdrop and with OPEC/non-OPEC compliance moving back to 100% with the likes of Russia now delivering over and above the required cut required in the Vienna agreement. More on this in my briefing which you can view HERE.

The Day Ahead…

Looking ahead the best of the day’s schedule comes in the form of central bank speakers rather than economic data with the headline act being Fed Chair Janet Yellen at 1745BST. The topic of discussion is ‘inflation, uncertainty and monetary policy’, so the content couldn’t be more relevant for financial markets, however, given the close proximity of the recent FOMC meeting I am not expecting much in the way of fireworks from the event itself. Despite this, Mester (1430BST) and Brainard (1530BST) are also speaking ahead of the Fed chair and given the fact they sit at opposing ends of the policy spectrum it should prove to be an interesting day. As a reference, FFR futures are pricing in a 76.4% probability of a 25bps interest rate hike in December. Finally, I would still remain vigilant for Brexit leaks from the on-going 4th round of negotiations with the FT reporting yesterday that Brussels had rejected calls for speedy talks on a transitional deal.