Risk off dominates as North Korean tensions blow up again

European bourses look set to follow Asian markets lower as the new week kicks off and North Korean tensions escalate once more. The rogue state’s latest nuclear weapons test has resulted in US President Trump lashing out and classifying Pyongyang’s actions as “hostile” and “dangerous”, with South Korea and Japan also condemning the move. Another step has been taken towards US military retaliation and intervention, resulting in investors looking to pull risk off the table and move into safe haven assets.

Kim Jong Un risks the wrath of China

The level of defiance that King Jong Un is showing is extraordinary. Whilst he knows the US will no doubt implement further economic sanctions, this time he risks the wrath of China, the only county that could potentially strangle North Korea’s economy. North Korea carried out the nuclear test on Sunday with full knowledge that it would enrage Beijing, with the timing threatening to overshadow the BRIC summit hosted by Chinese President Xi. Yet the rogue state paid little regard to this, which is concerning as it means there appears to be little preventing Kim Jong escalating the tension further.

Flows into safe havens rise once more

Given the geopolitical circumstance it is hardly surprising that riskier assets such as equity indices are feeling the heat. Asian markets dipped lower, whilst Europe is also heading for a weaker start. Meanwhile flows into safe havens once again increased in what is becoming a regular pattern on a Monday after another weekend of defiance from Pyongyang. Gold got off to a volatile start to the week, surging over $11 higher as it sets its sights on $1350. Safe haven currency the Swiss Franc is also moving northwards as sentiment pushes risk off trades higher. Interestingly the Japanese yen, another typical safe haven currency is also moving higher, a rather odd choice by traders given its proximity to any potential ground zero.

US NFP disappoints

The North Korean developments add to the concerns of the investors already trying to grapple with Friday’s weak non-farm payroll data. The Labour Department’s jobs report showed that a disappointing 156,000 jobs were created in August, well below the 180,000 analysts had been expecting. The figures for June and July were also revised lower, whilst the unemployment rate ticked higher. The softer reading on Friday was even more surprising given the strong ADP private payroll data and the solid reading to the jobs element in the ISM manufacturing report. Whilst one weak month by no means constitutes a trend, the softer figures have created more uncertainty surrounding any potential moves by the Federal Reserve regarding another interest rate rise by the end of the year. Reduced clarity of potential Fed action is doing little to abate the problem of runaway euro strength; the euro is once again moving higher versus the dollar in early trade on Monday.

ECB manage expectations ahead of Thursday’s meeting

The euro has surged over 14% higher this year which is putting a damp spin on any ECB hopes of eurozone inflation moving higher in the coming weeks or months. ECB concerns over euro strength have already surfaced on several occasions in recent weeks and Friday was the latest show of nerves when the ECB said it will most likely wait until the December meeting to give any update on how it intends to end or wind down the current quantitative easing programme.

UK construction pmi

Looking at UK economic data, Friday saw the release of the manufacturing pmi which produced the best reading in six years. This was some much needed good news for the pound which is struggling under the lack of progress in Brexit negotiations. However, it seems unlikely that the construction pmi due this morning will be able to reproduce such good news, given how the sector has struggled in the face of Brexit. That said an uptick to 52.1 from 51.9 is pencilled in for August.

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