US: Geopolitical tensions on the rise – BBH

Analysts at BBH note that there has been no apparent attempt by either North Korea or the United States to ease the rhetorical flourishes that have made global investors nervous.  

Key Quotes

“Risk assets were liquidated and the funding currencies, particularly the Japanese yen and Swiss franc, were bought back.  The yen gained 1.5% this week, ahead of the US session, while the Swiss franc gained 1.2%.  Gold is edging higher today for the fourth consecutive session, and is up 2.4% for the week to reach levels not seen in two months.”

“South Korean equities fell 1.7% today to bring the loss for the week to 3.2%.  Tokyo markets were closed today for a public holiday and the MSCI Asia Pacific excluding Japan fell 1.5% and 2.4% for the week.  MSCI Emerging Market equity index also lost 2.4% this week to snap a four-week advance.”

“The Korean won eased less than 0.2% today, which brought the weekly loss to 1.6%.  It eclipsed the Philippine peso as the weakest in Asia, but only a couple hundredths of a percent.  After the yen, the Chinese yuan was the strongest in the region, gaining almost 1%.”

“Market participants are likely to remain anxious about the geopolitical developments into the weekend.  This anxiety may overshadow the last economic highlight of the week, US CPI.  Headline CPI (year-over-year) is expected to rise for the first time since February (1.8% vs.1.6%).  Most expect the core rate to remain unchanged at 1.7% for the third consecutive month.  If there is a surprise, we suspect it is to the upside of the core rate, perhaps encouraged by the uptick in the medical services component of the PPI (released yesterday) that feeds into the CPI.”

“NY Fed Dudley's comments yesterday did not address specifics about monetary policy. However, his broad-stroke characterization of the economy leaves little doubt that the Fed's leadership is on track to announce next month the start of its gradual balance sheet operations.   The resilience of the US economy was recognized, and despite the weakness in prices in H1, Dudley, like other Fed officials, continues to expect inflation to rise toward its medium-term target.  The Fed’s Kaplan and Kashkari speak today.”

“The FOMC minutes from last month's meeting will be reported next week.  We expect the concern about the lack of price pressures was generally shared and that there is no urgency to hike in September.  Instead, by beginning the balance sheet operations, the FOMC buys time to monitor prices going forward.  We continue to think the odds of a December move are more than 50/50 for which the market is pricing in about a 1 in 3 chance.”