Korea tensions rattle markets

August 14, 2017

Last week markets were focussed on the ratcheting tension between North Korea and the US, and the prospect of conflict in the region. Donald Trump has taken the strategy of matching the rhetoric coming from North Korea with equally confrontational comments. He has indicated that he would be willing to take military action against the nation to prevent further development of the North Korean nuclear programme or as a response to aggression. This has concerned markets as Trump has now committed to taking action if North Korea proceeds with any threats. The nature of any conflict and the damage it would cause is widely debated, although the social and economic toll would likely be severe. A conflict would leave South Korea severely affected as well as trade flowing through the region disrupted. While markets are used to the ongoing concerns over this issue, the change in strategy from Trump has once again introduced some uncertainty.

China’s foreign exchange reserves suggest that outflow pressures may have continued to ease last month. The value of the reserves amounted to $3,080.7bn at the end of July, up $24bn from a month earlier. Last week’s figure suggests the People’s Bank of China (PBOC) largely refrained from foreign exchange intervention last month. July could mark the first month since October 2015 in which the PBOC was not a net seller. But even if it turns out that the PBOC continued to sell small amounts of dollars last month the big picture would still be that capital outflows have eased. This shift should prove positive of the renminbi.

Data released today showed that core inflation remained weak in the US in July. Core inflation is the measure of price changes excluding the effects of volatile food and energy prices. However, there are signs that it will rise during 2018. Outside the US, core inflation will probably rise only gradually. In advanced economies as a whole, it is likely to remain below 2% for the foreseeable future. Deflationary pressures from changing demographics, advances in technology and use of the internet are predicted to continue. Nevertheless, accelerating wage growth will have the potential to drive prices, if labour markets continue to tighten.

Index Open Close Change % Change
FTSE 100 7511 7309 -202 -2.7%
S&P 500 2476 2441 -35 -1.4%
Dax 12297 12014 -283 -2.3%
Cac 40 5203 5060 -143 -2.7%
Nikkei 225 19952 19729 -223 -1.1%
UK 10 Year Gilt Yield 1.18 1.09 -0.09 -7.6%

 

UK inflation data for July is due on Tuesday followed by US and UK retail sales on Tuesday and Thursday respectively.