by Pinchas Cohen
Risk appetite has returned to markets as last week’s imminent threats moderate.
Irma, the first back-to-back hurricane since 1964, after it followed in Harvey's wake, was downgraded to Category 4 as it hit Florida yesterday and downgraded further still earlier this morning to Category 1, even though the high winds and rain continue. While the storm has already caused horrific damage, it struck the US with less force than feared and appears to have spared Miami, lowering estimates for ultimate economic damage.
As well, the much-feared North Korean “founding day” holiday celebration, which took place Saturday, didn't result in an additional intercontinental ballistic missile test. Rather, Pyongyang downgraded celebrations to a massive, state-sponsored banquet.
Asian stocks, European and US futures jumped. Japan’s benchmark TOPIX index gained the most in three months, on a falling yen. This boosted exporters and rendered Japanese shares cheaper for foreign investors.
European futures advanced; S&P 500 Futures surged 0.5 percent, while Treasuries plunged along with gold, the yen and the Swiss franc, as the dollar rebounded from its lowest point since January 2, 2015.
Oil climbed too, as Gulf Coast refineries that had been hit by Harvey began going back on line, abating fears of a reduced demand.
Shares in Europe took their cues from their futures counterparts. The Stoxx Europe 600 Index jumped higher, the most in over a week, along with all the main eurozone indices and every major sector.
Still, much like the debt ceiling deal, which spurred investor relief, the current situation could end up being nothing more than a short-term reprieve. Last week's threats can still come back harder, delivering a negative wallop as markets wake up to the fact that nothing was actually fixed and President Donald Trump's turn toward the Democrats could end up weakening the possibility of tax cuts, as discussed here. This is especially worrisome as the taller the market gets the harder it falls.
As for Irma, the most dangerous aspect of the storm, the storm-surge, is possibly ahead. During the next 24 hours, water moving inland from the coastline could wreak the worst havoc yet.
North Korean risk remains firmly on the table as well. This morning, Pyongyang threatened retaliation if harsher sanctions were approved by the UN Security Council. More recent reports indicate that softer sanctions may end up being voted on instead. Notwithstanding, certain US equity sectors may be delivering clearer signs of impending adversity than the broader S&P 500.
Since Federal Reserve policy makers are prevented from speaking the week before the Fed's policy meeting, investor focus will now be directed primarily at assessing the impact of the two hurricanes. Therefore, a storm-surge would find investors enmeshed in a focus-vacuum, whose lack of any significant additional inputs could potentially propel extremely sharp market moves.
Last week, New York Fed President William Dudley was interviewed by CNBC. He said he had downgraded his third-quarter estimate “a touch” even as he reiterated that interest rates “are going to move gradually higher over time.” Upcoming economic releases this week that may have last-minute influence on the Fed are retail sales and inflation data.
21:30: Australia – NAB Business Confidence (August): index expected to fall to 9 from 12.
From yesterday's Week Ahead post:
After the Aussie dollar topped 1.1000 in late 2011, it had bottomed in the beginning of 2016 above 0.68000, a loss of 38.4 percent in a little over four years. In early July, it broke out of a range since April, providing a target of about 560 pips to roughly 0.8260, from its 0.7710 breakout. However, last week’s close failed to overcome the previous, late July 0.8066 high, suggesting a potential return-move to retesting the top of the range at about 0.7700. The fundamentals could be the relief of no North Korean ballistic missile on its “foundation day” on Saturday, together with the short-term debt-ceiling deal providing the dollar relief.
Indeed, no missile on Saturday by North Korea is spurring risk, which may fuel a return move, on a strengthening dollar, providing a better long entry for the currency pair.
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