Geopolitical Risks Continue to Weigh on Monday

Europe is set for a slightly negative start on Monday, threatening to extend its losing streak to three sessions as political and geopolitical risk continue to weigh on risk appetite.

Geopolitical risk could rear its ugly head again this week as the US and South Korea begin planned military exercises on Monday, just as tensions between the North and these two countries appear to have calmed. Should North Korea respond in kind, then we could see a repeat of the safe haven rush from a couple of weeks ago when the situation previously flared up between the countries.

The political situation in the US is another one to watch, with it taking over the reins last week as reports circulated that Donald Trump was about to lose one of his most important members of staff – Gary Cohn – but instead it was Steve Bannon that made way. While this is seen as far more palatable for investors, it still caps off yet another troubling week for the President.

This week could get off to a slightly slower start - barring any escalation between the US and North Korea or in Washington – with the bulk of this weeks scheduled economic events coming later on. The Jackson Hole Symposium is the obvious event people will be most interested in, with both Federal Reserve Chair Janet Yellen and ECB President Mario Draghi making an appearance.

Both central banks are on the cusp of announcing measures aimed at reducing monetary stimulus in the coming months, the question is whether they will use this platform to prepare the markets for such a move. Reports last week suggested that Draghi is unlikely to take the opportunity given how the markets have misinterpreted previous remarks, an odd decision given the number of times the central bank has claimed its not interested in this. Still, we can expect investors to pay very close attention to what he says and respond accordingly.

Yellen may not be so secretive on the other hand, given how open her colleagues have been when discussing plans to start reducing the Fed’s balance sheet, which currently stands at close to $4.5 trillion. Traders, though, may be more interested in hearing whether the latest inflation data has changed the view within the Fed on raising interest rates again this year, with markets currently unconvinced, to say the least.