North Korea rattles markets with nuclear test

North Korea was once again headline news over the weekend following a nuclear weapon test. The US Geological Survey recorded a tremor measuring 6.3 magnitude which was later claimed by the North Koreans as their most powerful nuclear test to date. Furthermore, they claimed that the bomb could be loaded onto a long range missile. Further reports that more missile and nuclear tests are planned has sparked an escalating reaction from South Korea in particular, who have traditionally been in favour of diplomatic resolutions. While a full scale war may still not be a central scenario, there appears to be a changing opinion in the global community that more needs to be done to contain the rogue state. Markets have struggled to price in the developments, however, there has been a slight rally in haven assets such as gold and a pullback in emerging market equities, which are considered to be the most at risk.

The UK manufacturing sector has seen growing momentum, helped by a near record in new orders for export. July’s Purchasing Managers Index (PMI) for the sector showed a reading of 55.1, up from the 54.2 recorded in June. Any reading above 50 indicates expansion. Exporters have been helped by the weak pound and strengthening Euro, making it more attractive for continental purchasers to buy from the UK, even with the risks from Brexit. However, as manufacturing only makes up 10% of UK GDP, even a rapid acceleration in activity is unlikely to significantly impact the overall picture of growth, which has been hit by a slowing service sector. Nonetheless, any rebalancing of the economy towards manufacturing and in particular, exporting will be welcomed by economists who are keen to see a narrowing of the trade balance and current account deficit.

Mixed news came out of the US last week. Second quarter growth in the world’s largest economy was revised up to an annualised rate of 3% from the 2.7% previously recorded. Furthermore, there were signs that this strong momentum was carried through to the start of the third quarter. However, data in August showed a slowdown in job creation for the month as well as a downward revision of July’s figure of 20,000. Collectively, this was a 44,000 disappointment on economists’ expectations and is beginning to point to a weakening picture. While it is reasonable to expect weakening jobs growth given the low level of unemployment, there has not been an accompanying acceleration in wage growth. Although monthly figures are notoriously volatile, a strengthening downward trend is beginning to develop.

Index Open Close Change % Change
FTSE 100 7401 7438 37 0.50%
S&P 500 2443 2476 33 1.35%
Dax 12167 12142 -25 -0.21%
Cac 40 5104 5123 19 0.37%
Nikkei 225 19452 19691 239 1.23%
UK 10 Year Gilt Yield 1.04 1.06 0.02 1.92%

UK manufacturing figures will be released on Friday as well as Chinese trade an inflation figures on Friday and Saturday respectively.