Daily Market Color

Flight to Safety Stalls with Reduced Irma, North Korean Uncertainties

Demand for haven assets faded to begin the week as the financial impact of Hurricane Irma is now projected to be less devastating than initially feared going into the weekend.  After making landfall in Florida as a Category 4 hurricane on Sunday morning, Irma weakened as it made its way up the state’s west coast, with its status changing to a Category 1 storm overnight.  Damage estimates are now near $50 billion – roughly a quarter of what had been forecasted late last week.  Also helping to curtail investors’ trepidation, North Korea did not proceed with any additional missile testing to commemorate its “Founder’s Day” as speculated.  However Kim Jong Un’s regime did issue a warning ahead of the United Nations Security Council meeting today, where additional sanctions on Pyongyang highlight the international community’s response to the nuclear test conducted over Labor Day weekend.  “In case the U.S. eventually does rig up the illegal and unlawful ‘resolution’ on harsher sanctions, the DPRK shall make absolutely sure that the U.S. pays a due price,” read a statement from North Korea’s Ministry of Foreign Affairs.



All three major US stock indices surged more than 1% during the trading session, with shares in insurers and cruise lines recording the largest bump following the downwardly revised economic damage estimates from Irma.  Treasurys sold off from the beginning of the day, and Treasury/swap rates are up 5-9 bps across the curve.  The US dollar gained for the first time in over a week, up 0.5% against major currencies.  Consistent with the risk-on market sentiment, gold futures experienced their biggest 1 day drop in two months – down over 1% to $1,332/ounce.  Crude oil prices rose more than 1% on the day as sentiment improved amid the reopening of refineries along the Texas Gulf Coast post-Harvey.  WTI crude is currently trading at $48/barrel while Brent crude is near $53.75/barrel.



With the Fed in its customary blackout period ahead of next week’s meeting, investors will look forward to the release of inflation and retail sales data on Thursday and Friday.  The Consumer Price Index is expected to rebound from July’s subpar 0.1% increase, with forecasts projecting a 0.3% monthly increase.  On the other hand, retail sales data for August are estimated to display a significant weakening in consumer purchases compared to July’s +0.6% level, weighed down by the impact of Hurricane Harvey.  The probability of a Fed rate hike by year end has steadily declined over the past month, and fed fund futures currently indicate a 35% chance of a rate increase by the December FOMC meeting.     


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