The markets kicked off the week with a firm risk tone. This comes after North Korea surprised the world by launching a test missile over Japanese soil, subsequently upping their arms testing. Naturally, Japanese PM Abe raised serious concerns, as did President Trump. The US Administration commented last week that they felt they were gaining control of the North Korea situation and this act of defiance clearly showed that was not the case. As such, the market reacted accordingly, with risk assets getting bought aggressively predominantly led by the Japanese yen.
In addition, we saw the markets absorbing the ongoing impact of Hurricane Harvey on the US. With Houston, in particular being seriously affected, 18 lives have now sadly lost to Harvey and a serious housing issue is looming. We have to consider the impact on US industry and with a large number of Oil Refineries in the eye of the storm, production has been halted at many thus, impacting the oil price resulting in raising gas prices. Initial estimates suggest over $100 billion worth of damage.
The impact of both of the above situations has weighed on the US dollar and coupled with a hawkish ECB leader Mario Draghi, at Jackson Hole on Friday, it has caused EUR/USD to push through 1.2000 level on Tuesday morning, but has since retraced back below.
In the UK we saw the Nationwide House Prices showing a slow-down in growth, which has been attributed to the impacts of and concerns around Brexit. We also hear from Eurozone Brexit negotiators that they have concerns about the speed of which the UK are conducting the talks. However, main market focuses lie elsewhere this week.
In the week ahead, aside from the geopolitical events, we look to focus on the Eurozone inflation data from 4 of the major members. The expectation is for a pickup in inflation, attributed to the higher fuel prices observed. Watch for any divergence from expectation, as this could hamper the tapering plans from Draghi’s ECB and bring about a reversal in the current trend in the Euro.
The main data event this week is unquestionably the raft of employment data on Friday. Non-Farm Payrolls will bring its usual level of volatility. At 1.30pm UK time, we will see the release of Headline NFP, Unemployment Rate and Average Earnings. With inflation being the most significant hurdle for the Federal Reserve’s plans regarding the path of US interest rates, significant attention must be paid the average earnings number as they are released together on Friday – the expectation is for 0.2% versus the 0.3% last month. The unemployment rate is expected in line with last month’s 4.3% reading and NFP is forecast at 180k versus last month’s 209k. As always watch out for a revision of last month’s number prior to the announcement.
Have a great week