Stock Markets Rattled By Trump’s Rhetoric
Stock market indexes around the world continue to slide for a third consecutive day as the exchange of threats between the US and North Korea spreads fears of war. Investors are seeking to buy assets considered safe havens such as the Japanese Yen and the Swiss Franc. The FTSE100 Index in London opened down 1.19% this morning, following yesterday’s drop of 1.44%. The DAX stock index in Frankfurt was down by 0.5%. An ING analyst said that the situation is beginning to look like this generation’s Cuban missile crisis.
Donald Trump said that his comments about “fire and fury” against North Korea “maybe..wasn’t tough enough.” The US president added that “things will happen to them like they never thought possible”, if Guam island gets hit by North Korea’s ICBMs. A state-run newspaper in China said that the Chinese should remain neutral if North Korea decided to launch an attack on US soil.
Pound Sterling – UK Markets
Today, the Pound retreated against the US Dollar with the exchange rate set at $1.29. Sterling rallied against the Euro with the exchange rate set at €1.10.
The National Institute of Economic and Social Research (NIESR) published a report which said that, according to its estimates, the British GDP grew by 0.2% in the three months to July, 0.1% lower than the first quarter’s reading. The report said that the UK economy continues to grow below its long-run trend of 0.6%. NIESR forecasts a modest economic recovery in the second half of the year, in response to a strengthening global growth and a weaker Sterling. According to the report, consumer spending will be reduced because of weak wage growth and investment spending held back by Brexit uncertainty. The NIESR is regarded as highly reliable.
EY Item Club’s senior economic advisor, Martin Beck, said on BBC Radio that the City should be expecting a tough few years ahead as business and mortgage lending are constrained by unfavourable economic conditions. Beck said that demand is declining since households are facing budget problems because of the high inflation. Beck also noted that the economic slowdown and the uncertainty caused by Brexit will reduce business investments.
US Dollar – US Markets
The US Dollar continued to strengthen against the Euro for a second straight day, with the exchange rate set at €0.85. Later in the afternoon, markets will be waiting for July’s US inflation data, which could change expectations for a Fed interest rate hike.
Inflation is expected to climb by 0.2% in July, on a month-to-month basis, or 1.8% on a yearly basis, which is still below the 2% target that the US Federal Reserve has set. Janet Yellen, the Fed’s Chair, has signalled that the Fed is willing to hike its interest rate as long as there is potential for an inflation rise. However, markets are not convinced and have priced in a 40% chance of an interest rate hike by the end of the year.
William Dudley, the New York Fed’s president, said that the Federal Reserve expects US inflation to rebound thanks to the weak US Dollar and the improving labour market. Dudley, who is considered Janet Yellen’s close ally, noted that the reason behind the weak wage growth is the sluggish productivity growth. A Reuters poll showed that economists in the US expect the economic expansion to continue for two more years, but not at the pace that the Trump administration has predicted.
Euro – European Markets
The Euro dropped against the US Dollar, with the exchange rate set at $1.17. A series of data releases from France, Italy and Spain came out in line with analysts’ expectations.
In France, inflation in July increased by 0.8%, on a year to year basis, while in Spain inflation declined by 0.7%, on a monthly basis. INSEE, the French bureau of statistics, published data regarding the Nonfarm Payrolls in the second quarter of the year, which increased by 0.5%, quarter over quarter. In Italy, data released by the Istituto Nazionale di Statistica, showed that inflation in July went up by 1.1%, on a yearly basis.
A Goldman Sachs report suggested that the recent Euro appreciation raised the issue of how the European Central Bank may respond to exchange rate strength. Analysts believe that the magnitude of the appreciation won’t be enough to result in an ECB rate cut. The report said that Goldman Sachs expects for the ECB to reiterate that rate increases will take place after the bond-buying programme has ended.
Other Currencies – Highlights
The Pound strengthened against the Australian Dollar, trading at 1.65 AUD. The Aussie also hit a four-week low against the US Dollar, but recovered slightly thereafter. The Governor of the Reserve Bank of Australia (RBA), Philip Lowe, said in a parliamentary hearing that the current market pricing implies a greater probability of a rate rise than a rate reduction. The Governor noted that wage growth remained near record lows, despite the success of the economy in creating jobs, adding that this happens worldwide. Lowe also said that a further appreciation of the Aussie would slow inflation’s pick up.
Sterling dipped against the New Zealand Dollar, trading at 1.78 NZD. JBWere, an advisory firm, published a report which says that the country’s economy has entered a productivity recession and is failing to create wealth. JBWere analysts suggest that GDP growth has been driven almost completely by adding more people to the economy, working more hours. Bernard Doyle, head of strategy at JBWere, said that employees are working harder, but not smarter. Doyle said that there is no improvement on the GDP per hours worked figure and added that he hopes the issue will be discussed at a political level.