Daily Market Color

Haven Assets Rally as Tensions with North Korea Persist

Financial markets re-emphasized the risk-off mode at the beginning of the trading session as investors returned from the long Labor Day weekend to escalated tensions with North Korea.  On Sunday it was reported that Pyongyang conducted its sixth nuclear bomb test since 2006 and its most powerful to date, an advanced hydrogen bomb which could be mounted onto an ICBM.  In response, an emergency U.N. Security Council meeting was called yesterday to discuss additional sanctions against North Korea and its trade partners.  The US ambassador to the United Nations, Nikki Haley, stated that “we will look at every country that does business with North Korea as a country that is giving aid to their recklessness and dangerous nuclear intentions.”   Additionally, President Trump agreed to support billions of dollars in new weapons sales to South Korea with the intention to bolster its defenses against North Korea, which is reported to have plans to launch another test missile before the end of this week.

US Treasurys rallied strongly with the flight to safety, and yields/swap rates are currently down 2-11 bps across the curve.  The 10-year note yield is now near 2.06%, down more than 10 bps on the day — its lowest level since November.  Also contributing to the drop in rates, earlier today Federal Reserve Governor Lael Brainard struck a dovish tone during a speech at The Economic Club of New York in which she stressed the need to “be cautious about tightening policy further until we are confident inflation is on track to achieve our target.”  Brainard stated her comfort with the potential for consumer prices to move above the Fed’s target for some time before implementing another rate hike, while allowing the Fed’s balance sheet to unwind in the meantime, beginning later this year.  Other Fed speeches on the docket for this week include NY Fed President William Dudley and Dallas Fed President Robert Kaplan.

 

 

All three major stock indices plunged on the day, with the DJIA down more than 1.1% to a two-week low.  The CBOE Volatility Index (VIX), otherwise viewed as a market fear index, rose as much as 38% during the trading session.  In commodities, both oil and gasoline futures reversed a portion of last week’s movement, as WTI crude gained 2.9% and RBOB gasoline fell 3% on the day.  Gold increased with other haven assets, up 0.5% for the session to its highest level in a year at $1,341/ounce. 

 

 

Abroad, the European Central Bank is slated to meet this week, where investors await the governing council’s plans for the removal of monetary accommodation, particularly as they relate to the recent appreciation in the euro.  With the stronger euro, there has been increased concern as to whether eurozone exporters will be substantially impacted, and in turn, place downward pressure on the region’s inflation.  As of July, headline inflation in the eurozone was recorded at 1.5% and core inflation at 1.2%, both shy of the ECB’s target of 2%.

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