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Volatility Persists in Global Financial Markets as Geopolitical Tensions Escalate

Global financial markets remained in risk-off mode today as geopolitical tensions continue to build between North Korea and the United States.  In response to the threatened attack on Guam by the North Korean military yesterday, both South Korea and Japan voiced their intention to strike back at Pyongyang in such a scenario.  President Donald Trump escalated matters further today in stating that his initial threat of “fire and fury” may not have been “tough enough”, adding that it is “not a dare, it’s a statement.”   Major stock indices in all areas of the world posted declines as investors maintained a cautious outlook.  The DJIA (-0.95%), S&P 500 (-1.45%), and Nasdaq (-2.15%) all posted their largest losses in the past three months while the CBOE Volatility Index (VIX), a measure of volatility in US equities, surged 45% to a post-election high of 16.12.  US Treasurys rallied in the flight to safety move, as yields/swap rates declined 1-6 bps across the curve in a bull flattening pattern.  The yield on the 10-year note is trading just below 2.20% to close the day, its lowest level in more than a month.

 

 

Another light day of economic data releases was highlighted by July’s producer-price index for final demand, which unexpectedly decreased a seasonally adjusted 0.1% MoM.  The reading represented the first decline in the past eleven months, pointing to further weakness in price pressures as inflation remains the chief uncertainty in the Fed’s plans for future rate hikes.  The core PPI also fell 0.1% in July (+0.2% expected), bringing the YoY increase to a +1.8% — still below the 2.0% target level.  Speaking on inflation earlier today, New York Fed President William Dudley provided his expectation for the recent decline in the dollar to boost price levels back to a point which would warrant an additional hike this year, in addition to the commencement of the Fed’s balance sheet normalization. Other data on the day included initial jobless claims for the week ended August 5th, which showed a 3,000 increase to a seasonally adjusted 244,000 in new claims. Additionally, the four-week moving average of claims fell by 1,000 to 241,000, while the number of continuing claims declined by 16,000 to 1.951 million for the week ended July 29th.  The Labor Department’s CPI report is set to highlight economic data reporting tomorrow, with expectations pointing towards a 0.2% monthly increase and 1.7% YoY gain.

 

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