Safe Havens Fall Amid Missile Fatigue

North Korea’s latest missile test overnight has not managed to generate a lasting market reaction. The launch is the second to fly over Japan in less than a month and the first since the U.N adopted fresh sanctions earlier this week.

Note: Japan’s Defense Minister indicated that the missile launched could be an intermediate range ballistic missile (IRBM). The UN Security Council is expected to meet later this afternoon (3 pm EDT).

Global equities have traded mixed as Pyongyang latest missile launch raised geopolitical tensions, though declines in traditional risk assets – gold, yen and CHF – indicate that many investors are becoming somewhat accustomed to the sequence of baiting and diplomatic reaction.

Yesterday’s stronger than expected U.S consumer inflation data is lending pockets of support for the ‘mighty’ dollar and U.S bond yields as fixed income dealers increase their bets for the potential of another Fed rate hike in 2017.

Markets focus now shifts to this morning’s volatile U.S retail sales (08:30 am EDT), industrial production (09:15 am EDT) and consumer sentiment print (10 am EDT).

1. Global stocks mixed reaction

In Japan, the Nikkei share average ended higher overnight (+0.5%), and posted its biggest weekly gain in ten-months (+3.3%) as a stronger dollar supported exporters. Investors basically shrugged off N. Korea’s missile launch that happened to knock risk appetite in wider Asia. The broader Topix advanced +0.4%.

In South Korea, the Kospi index ended +0.4% higher after dropping as much as -0.5% intraday, while down-under, Australia’s S&P/ASX 200 Index fell -0.8%.

In Hong Kong, the Hang Seng Index swung between gains and losses (+0.1%), while the China Enterprises Index lost -0.3%.

In China, equities end the week lower on signs that Chinas economy may be losing steam. The blue-chip CSI300 index ended little changed, while the Shanghai Composite Index fell -0.5%. For the week, the CSI300 rose +0.1%, while SSEC slid -0.3%.

In Europe, regional indices trade mostly lower, led again by the FTSE 100 which has continued yesterday’s steep drop after ‘hawkish’ commentary this morning from the BoE’s strongest ‘dove’ has pushed GBP +1.2% higher outright (see below).

Indices: Stoxx600 -0.1% at 381.6, FTSE -0.7% at 7247, DAX flat at 12536, CAC-40 flat at 5225, IBEX-35 -0.2% at 10341, FTSE MIB flat at 22274, SMI -0.4% at 9040, S&P 500 Futures -0.1%.

West Texax Oil

2. Oil falls as markets dip on N. Korea tensions, gold lower

Ahead of the U.S open, oil prices are a tad softer as global markets weaken following N. Korea’s latest missile launch.

Nevertheless, crude prices remain atop of their five-month highs reached this week on bullish demand forecasts and U.S refineries restarting.

Brent crude futures are down -18c at +$55.29 a barrel, however the benchmark remains on track for its third consecutive weekly gain and the highest weekly rise since the end of July.

U.S West Texas Intermediate crude (WTI) is down -16c at +$49.73 a barrel. The contract is set for a +5% weekly gain, also its strongest in nearly two-months.

Note: OPEC this week forecasted higher demand for its oil in 2018 and pointed to signs of a tighter global market, while the IEA said the global oil glut was shrinking due to strong European and U.S demand, as well as production declines in OPEC.

Spot gold has slipped overnight (down -0.2% at +$1,326.70 an ounce), shrugging off N. Korea’s latest missile launch. Strong U.S inflation data yesterday is raising the spectre of another Fed hike by year-end interest, which is supporting the U.S dollar. The ‘yellow’ metal is down over -1% for the week, on track for its first weekly decline in a month.

Gold

3. BoE’s most ‘dovish’ member now sees need for rate hike

The BoE’s most ‘dovish’ member has changed his view and now thinks a hike may be needed soon.

In a speech this morning, Gertjan Vlieghe said the U.K economy was “running through its spare capacity quicker than he had expected, while household spending was stronger.”

Fixed income dealers now peg a 50-50 chance that the BoE will raise its policy rate in November after his comments, which have boosted Sterling Overnight Index Swap Average (OIS) this morning. The probability of a +25 bps rate rise has jumped from +0.25% to +49.92% – it stood at +33.32% after yesterday’s BoE decision and minutes. Ten-year gilt yields have backed up to +1.282% from +1.244%.

Elsewhere, the yield on U.S 10-year Treasuries advanced +1 bps to +2.19%, while Germany’s 10-year Bund yield dipped -1 bps to +0.41%, the first retreat in more than a week.

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4. GBP hits 15-month highs on a ‘hawkish’ dove

Sterling (£1.3569) continues its relentless rally in European trading, adding to yesterday’s gains in the wake of the BoE sounding in favor of raising interest rates sooner than the market has expected. While voting 7-2 yesterday to hold steady, the post-meeting statement pointed to a November tightening amid central-bank forecasts of +3% inflation in October.

The EUR (€1.1949) remains better bid outright, helped as the dollar underperforms against a strengthening pound. It’s also being supported by comments from ECB policymaker Sabine Lautenschlaeger who reiterated that “it is time to decide on scaling back bond purchases next year and that conditions are in place for inflation to reach a stable trend.”

The JPY (¥111.24) is well off its overnight highs despite another missile launch from N. Korea. Investors seem happy to speculate that the ongoing tension on the Korean Peninsula would not lead to any actual military action.

EURGBP

5. Eurozone wage growth hits two-year high

Data released this morning by the E.U statistics agency suggest that things are about to change on the inflation front for the ECB.

Eurozone wages rose at the fastest pace in more than two years during the three months to June, a sign inflation may be set to rise to the ECB’s target.

Eurostat said wages were +2.0% higher in Q2 than a year earlier, the fastest rise since Q1 of 2015 and up from +1.3% in the previous three-month period.

Note: The missing element in the link between growth and inflation has been wages, which have grown more slowly than President Draghi and company had expected.

Currencies

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