Week in Review: Geopolitical Tensions Rise

For the week ending 11 August 2017

  • War of words between North Korea and US intensifies amid UN sanctions
  • US inflation rises less than expected
  • Venezuelan Constituent Assembly declares itself superior
  • South Africa’s Zuma survives confidence vote
  • UK floats trial balloon on divorce settlement

Global equities gave ground this week amid intensifying geopolitical concerns as tensions between North Korea and the United States ratcheted higher. Safe-haven assets were in demand as investors struck a risk-off posture. Bonds rallied, pushing the yield on the 10-year US note to 2.21% from 2.27% a week ago. Safe-haven currencies such as the Swiss franc and Japanese yen firmed, as did precious metals. Oil prices retreated modestly, as West Texas Intermediate crude declined to $48.20 a barrel from $49 a week ago. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), rose considerably, to 15.50 from 9.90 last Friday.

MACRO NEWS

North Korea threatens Guam after Trump’s warning
US president Donald Trump warned North Korea in no uncertain terms this week that its continued threats, if carried out, would be met with overwhelming force. North Korea, undeterred, announced it was planning to target the waters surrounding the US territory of Guam with four missiles and that a plan would be ready within a matter of days. Trump responded by noting US military plans are now “locked and loaded” should North Korea act unwisely. Earlier this week intelligence assessments became public revealing that North Korea has likely acquired the technological capability to miniaturize a nuclear warhead, making it deliverable by missile. North Korea recently tested a missile believed to have the range to reach parts of the United States. Tensions have risen further in the wake of additional United Nations sanctions against North Korea that were unanimously agreed upon by the UN Security Council. The sanctions aim to cut North Korean exports by one-third and ban exports of coal, iron ore and seafood.

Muted US inflation data raise questions for Fed
The Consumer Price Index rose just 0.1% in July after not rising at all in June, the fifth straight month of below-forecast inflation figures. While the US Federal Reserve has said it sees the recent decline in inflationary pressures as transitory, markets are not so sure. Futures markets forecast just a 40% chance of another rate hike before the end of this year.

Venezuelan superbody declares itself supreme
The newly created Constituent Assembly this week declared itself supreme over all other branches of Venezuela's government. A growing list of governments, including the US, the European Union and the supranational Organization of American States, have declared the assembly illegitimate. The US went so far as to sanction eight individuals with roles in the body’s formation, but has yet to sanction Venezuela’s oil industry, which is the third-largest global exporter of crude to the US.

South African president survives no-confidence motion
Jacob Zuma, the embattled president of South Africa faced the fourth no-confidence motion of his presidency on Tuesday, the first voted on by secret ballot. Two hundred and one votes were needed to remove Zuma, but the measure failed by a vote of 198–177, with seven abstentions.

UK opens the bidding at €40 billion?
British negotiators appear to have floated a trial balloon in the press on the size of the divorce payment Theresa May’s government would be willing to pay to leave the European Union. The Sunday Telegraph reported that the United Kingdom would be willing to pay €40 billion, but only on condition that the payment come as part of a deal that included the future trade relationship with the EU. UK officials shot down the report as speculative, but it would appear to be a reasonable starting point for negotiations. EU officials have floated exit-charge figures of between €50 billion and €100 billion.

EARNINGS NEWS

As of 9 August, 447 of S&P 500 Index companies have reported earnings for the second quarter. Earnings for the index as a whole are expected to rise 11.9% compared with the same quarter a year ago, and 9.2% when stripping out energy companies. Revenues are seen up 5.1% versus Q2 2016, 4.1% ex-energy.

THE WEEK AHEAD

Date

Country/Area

Release/Event

Mon, 14 Aug

Japan

Q2 Gross domestic product

Mon, 14 Aug

China

Retail sales, industrial production

Mon, 14 Aug

eurozone

Industrial production

Tue, 15 Aug

United Kingdom

Consumer price index

Tue, 15 Aug

United States

Retail sales

Wed, 16 Aug

eurozone

Q2 Gross domestic product

 Wed, 16 Aug

US

Housing starts and building permits

 Thu, 17 Aug

UK

Retail sales

 Thu, 17 Aug

eurozone

CPI, trade, ECB minutes

 Thu, 17 Aug

US

Industrial production

 Thu, 17 Aug

Canada

CPI

 

 

 

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

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