US/North Korea – Currently no signs of deceleration

Crisis will determine markets next week as well

This week, the most important topic on the market was the escalation of the conflict between North Korea and the US. While last week, markets were relatively calm with regard to the tone becoming rougher between the countries, North Korea's threat to attack the US military base on Guam and President Trump's threat (‘Fire and fury, like the world has never seen') caused risk aversion to set in on markets. The yields of German and US government bonds fell, as did equity markets, while the Swiss franc and price of gold rose. No one knows how the conflict will develop, but a continuation of the uncertainty next week seems likely; as of the end of this week, no mitigation of the tone was seen. On the contrary, President Trump increased the pressure and said that his threats maybe had not gone far enough yet. Thus, the conflict between the two countries will likely remain the determining topic on markets. Markets are currently not pricing in a worsening of the conflict beyond an exchange of threats. This is the most likely scenario, as a military confrontation would be in no one's interest. However, the crisis could escalate further. Should North Korea again perform a missile test (successfully), the US would almost be forced to react, probably with a strengthened military presence. Then, at the latest, the markets would get another push in the direction taken this week. Should the crisis spiral into a military confrontation, negative consequences for the global economy look likely, at least temporarily. High uncertainty could slow down investment and consumption expenditures and trade with the region could be affected, with unknown consequences for global supply chains. South Korea, for instance, has a substantial share in the global export of semiconductors.

Coming back to the most probable scenario (that the conflict remains at the level of words), economic data should be in the background next week. The relevance of retail sales for July as an indication for the future path of the economy will likely be seen as limited. The same could be said for the minutes of the last FOMC meeting on the outlook for monetary policy. At the end of the week, the Univ.of Michigan Index, which measures consumer sentiment, will be published. This could get more market attention, as it will be the first indication of the impact of the crisis on consumer confidence and eventually consumer spending.

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