Asian markets retreated on Monday as investors sold risky assets such as equities and moved into safe havens such as gold and the Japanese yen. The risk off sentiment occurred in response to weekend developments, after North Korea conducted their largest ever nuclear weapon test. Japan’s Nikkei fell in response to the stronger Yen, which gained over 1% at the open versus the USD. Losses were smaller in Australia as investors there remained more upbeat.
European markets also retreated on risk aversion as investors weighed the news of North Korea’s nuclear test, and the possibility of another ballistic missile test later this week. The drop snapped a three session winning streak for European equities, and may have set the tone for another risk-off week in markets considering the heightened geopolitical tensions caused by the latest North Korean moves and the U.S. response, which was still measured, but left little doubt of U.S. feelings as Defense Secretary James Mattis warned of “massive military response” to the North Korean provocation. The news also boosted the Euro as investors moved to the shared currency as a haven against risk.
Markets in the U.S. were closed for the Labor Day holiday, but U.S. stock futures were lower and markets could easily open to the downside when investors return on Tuesday.
FOREX
EUR/USD
The pair gained early in the session on safe haven demand, but quickly gave back the gains and moved back below the 1.1900 level. There is growing caution from European traders as they look ahead to this Thursday’s meeting of the European Central Bank to set the latest monetary policy. There have been continuing hopes that the ECB will soon begin tapering their bond purchases, and this meeting may see the beginning of those plans.
AUD/USD
The pair remains mired just below the key resistance level at 0.8000 and Monday was no different. Traders now have the Reserve Bank of Australia monetary policy meeting to confront, and while no changes are expected, the tone of the statement will be closely examined to determine the current bias of the central bank. Traders will also have several Fed governors speaking tomorrow, which could have a significant impact on the USD throughout the North American session.
Cryptocurrencies
News that China would be banning ICOs (Initial Coin Offerings) weighed heavily on cryptocurrencies in general on Monday. Bitcoin dropped as low as $4,200 before finding support, and both Ethereum and Litecoin fell more than 10% for the day, although they were well off their session lows as they began to recover along with Bitcoin late in the trading day. China has been a large market for the cryptocurrencies, and this latest move has speculators worried that liquidity may dry up, causing even greater volatility than is already the case.
Commodities
Metals
Precious metals made substantial gains Monday in London and in electronic trade as U.S. metals markets traded just half a day due to the Labor Day holiday. Investors moved convincingly into the safe haven metals, taking gold to a one-year high as tensions rose between North Korea and the U.S. over the weekend.
Oil
U.S. WTI crude futures gained on Monday, while Brent crude in London ended the day flat as some Gulf Coast refineries came back online following the flooding caused by hurricane Harvey. At one point 22% of U.S. refining capacity had been offline, but as of Monday that figure is closer to 17%, and is expected to continue improving. It was also announced that an important pipeline which pumps gasoline from Texas to the east coast of the U.S. will reopen on Tuesday, easing fears that too much crude would be going into inventory.
Indices
S&P 500
S&P500 futures tumbled on Monday as investors get ready for a lower open on Tuesday after the weekend provocation from North Korea. Losses should be broad based, but we could see upside from defensive sectors such as utilities and real estate.
FTSE 100
The British benchmark index slipped lower on Monday as risk aversion grew among market participants. One bright spot was the gold miners, and the current situation signals that gold and the gold mining companies can continue higher. This should mute losses in the FTSE100, and provide a haven for investors. Downside moves can be expected from financial stocks.
Stocks
Anglo American (LON:AAL) PLC
The stock has been gaining strongly since July, and recently traded above its 52 week moving average as demand for mining shares in general has been extremely strong. Rising raw commodity prices and a belief that the Chinese economy is recovering strongly have helped the entire mining sector higher. With the stock trading above its 52 week high, it should be able to continue until it reaches the resistance around the 1,600p level, which is roughly 15% above the current share price. That should give investors good opportunity to take advantage of the rising price before the rally pauses to consolidate.