Euro turns sour-kraut after ‘wurst’ day of 2017

Investors have started to ease out of havens and back into riskier assets after US officials dismissed North Korea’s exaggerated talk of a ‘declaration of war’. Gold has pulled back from yesterday’s spike high while European stocks edged higher. The euro hit a one-month low against the dollar on Tuesday following its worst day on 2017 after the German election.

Equities: AA shares breakdown, Card Factory profits fold

A jump in the energy sector thanks to a sharp rise in the price of oil was offset by broader weakness in the FTSE 100 amid disappointing corporate results and strength in the pound. Shares of AA and Card Factory stood out for the wrong reasons at the bottom of the FTSE 250. UK equity indices near record highs belie the weakness suggested by the increasing frequency of huge negative reactions to UK corporate results.

Shares of Card Factory slumped double digits on Tuesday after reporting first-half results. The 15p-per-share special dividend may be ill-timed when pre-tax profit was down -14%. The combination of declining footfall on the high street and rising costs thanks to a falling pound have become big red flags for investors.

A profit warning saw AA shares break down despite reporting a rise in first-half profits and appointing Simon Bakewell as its new permanent Chief Executive. A delay in an IT infrastructure upgrade is being viewed as an unwelcome short-term cost and a potential thorn-in-the side of AAs online growth.

Shares of United Utilities slipped slightly on the main UK equity index in reaction to earnings. The decline takes UU shares down close to two-year lows. Higher revenue is welcome but rising debt levels are a concern for a typically highly-leveraged industry when UK interest rates are set to rise.

Forex: EURUSD 1-month low, yen back as haven

Political uncertainty after the German election has sent the euro tumbling to a one-month low against the dollar and two-month low versus Sterling. The weakened position of Chancellor Merkel’s leadership has brought to the surface some uncertainty about the workability of a ‘Jamaica’ coalition government. The two minor parties have many opposing viewpoints. If no coalition can be found, another election can’t be ruled out.

The impact of rising nationalism and a possible coalition between Merkel’s CDU/CSU with the Liberal Party is already seemingly affecting German policy. Germany made a series of official statements on Tuesday opposing the elements of French president Macron’s speech pushing for greater European integration. We view the long-term viability of the euro as hinged on EU fiscal integration.

The Japanese yen was a little softer on Tuesday having made significant gains as a haven trade following sabre-ratting comments from North Korea. North Korea directing its attention at the US (as opposed to firing missiles over Japan) made using the yen as a haven more straightforward.

Commodities: Oil at 2-year high, gold spikes

Reduced supplies from the Kurdish region of Iraq ahead of a planned referendum has added a geopolitical dimension to the rise in oil prices. Turkish President Erdogan threatening to invade Iraq to deter the referendum only adds to the potential for energy supply disruption, not-to-mention political uncertainty.

The price of gold was drifting lower on Tuesday, having shot back above the critical $1300 per barrel mark on renewed North Korean tensions. Without an escalation from the US, any gains in gold could be fleeting. There are signs the US dollar has found a temporary base thanks to the Fed’s plans for shrinking its balance sheet in October and souring sentiment toward the euro-region after the German election.