Daily Market Color

Global Financial Markets Back in Risk-On Mode with Easing Geopolitical Tensions

Demand for safe haven assets eased in the opening trading session of the week after a weekend without the ratcheting up of additional geopolitical tensions.  Yesterday, two top US security officials publicly dismissed the possibility of any imminent nuclear exchange between the US and North Korea, with CIA Director Mike Pompeo stating that “I’ve seen no intelligence that would indicate that we’re in that place today,” and national security adviser H.R. McMaster affirming that “we’re not closer to war than a week ago, but we are closer to war than we were a decade ago.”  The comments were welcomed by nervous investors who had been in risk-off mode during last week’s series of escalating threats between the US and North Korea.  All three major US stock indices surged 0.6%-1.3% today, with volatility gauges which had jumped last week, retreating nearly 25%.  Treasurys experienced a modest selloff during the trading session, as yields/swap rates increased 1-4 bps across the curve, bringing the yield on the 10-year note back above 2.22%.  The US dollar gained 0.3% against major currencies, highlighted by a 0.5% increase vs. the Japanese yen to 110 JPY per US dollar.



In commodities, crude oil futures plummeted 2.5% after industrial data out of China were weaker than anticipated.  Measures of industrial output, retail sales, home sales and fixed-asset investment reported earlier today all missed expectations, as the Chinese government’s clampdown on risky lending, primarily in real estate, is beginning to weigh on economic performance.  YoY industrial output grew at a 6.4% pace in July, its slowest rate in the past five months.  With the tempered demand out of China adding to the ongoing concerns over a global supply glut in energy markets, a barrel of WTI crude fell more than $1.25 to $47.50 — its lowest level in three weeks. 



Internationally, Japan reported better than expected GDP growth during the second quarter of this year.  On an annualized basis, the Japanese economy expanded at a 4% pace in the period from April to June, its steepest quarterly increase in more than two years.  It was the sixth consecutive quarter of economic growth in Japan and far exceeded median forecasts of +2.4% YoY.  The surge was driven largely by robust domestic private spending (+3.7%), which was a positive sign for the Bank of Japan, whose goal it is to reduce the nation’s dependency on foreign consumer demand.  Exports from Japan declined at a 1.9% annualized rate during the quarter in reflection of the cyclical reduction in global smartphone demand.            


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