Trump declined to rule out a pre-emptive strike

Market movers today

• In the US, CPI and CPI core for July are released today. Both inflation measures have been declining rapidly since February and are currently far below the Fed's 2% target and there is no immediate compelling argument for a drastic uptick. Although the Fed continues to believe the tighter labour market will eventually drive inflation up and the US dollar has recently depreciated sharply, these are both effects that take a long time to work their way into the CPI numbers. Thus, we believe inflation will continue to hover around 0.1% m/m (both headline and core), implying both figures increased to 1.7% y/y in July (in June, headline CPI read 1.6% y/y, while CPI core was 1.7%).

• Further, Federal Reserve Bank of Minneapolis President Kashkari (voter, dovish) and Federal Reserve Bank of Dallas President Kaplan (voter, dovish) both speak today.

• Germany, France, Spain and Italy all release their final HICP figures today.

• In Denmark, gross unemployment figures are out and in Finland, Fitch may publish the country's debt rating.

Selected market news

Financial markets are in risk-off mode as the stand-off between the US and North Korea continues to escalate, with North Korea threatening to send missiles towards the US bases at Guam. Last night, President Trump reacted to the new threats saying "They [North Korea] should be very nervous, because things will happen to them like they never thought possible, OK?". Trump also stood by his words from earlier this week to bring down "fire and fury" on North Korea. In fact, he said that the words earlier in the week might not have been "tough enough". Furthermore, Trump declined to rule out a pre-emptive strike.

The market jitters intensified on the obvious escalation of the conflict and US 10Y yields dropped by 5bp to 2.20%, German yields to 0.40% and in the equity market the colour was red across the board with the Nasdaq down more than 2%. The reaction in the equity market might have been aggravated by the fact that US equity indices were trading at or close to an all-time high going into this crisis. The market jitters are also very visible in the VIX index – the fear index – which rose 44% to above 16 yesterday night. But in that respect, note that the level for the VIX is still well below the level seen around the US presidential election for example. Hence, there is still room on the upside here. The market jitters have not necessarily peaked at this stage. In the FX market the safe-haven support for JPY has continued and USD/JPY has moved below 109 overnight.

There is a growing risk that the geopolitical concerns will continue. If that is the case, we would expect the biggest bond market impact to be on the US Treasury market. Investors will move into the highly liquid and not least ‘high yielding' US market. In that way they will also be able to benefit from a possible repricing of Fed expectations and a possible appreciation of the US dollar.

Today, the European market will continue to focus on the geopolitical jitters and we should expect lower Bund yields and lower equity markets as the markets open this morning.

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