RECAP

A heavy sigh and head shake as the global economy still reels itself from the rhetoric and saber-rattling of U.S. and North Korea. Nothing has changed in terms of geopolitical tensions, which seem to keep rising despite the best efforts of Rex Tillerson, Secretary of State of the U.S., as markets still see things heading towards a war.

This realization from the markets has managed to send the European and Asian shares downward and VIX, the so called “Fear Index”, to spike higher. U.S. futures continue to see a sell-off but at a modest pace compared to the rest of the world.

Friday has seen another flight to safety as safe havens, Gold, JPY, and CHF, all saw an increase in demand. Volatility and the Global Financial Stress Indicator both reached higher levels as the former reached a high of 17.28%, highest since the U.S. Presidential Elections.

European markets continued sliding into risk-off mode although at a slower pace; even so Europe’s where regional indices were set for the worst week of losses this year as sentiment on ongoing fears about escalation between the US and North Korea. Euro zone volatility jumped to the highest since April, when France’s election was rattling the region.  A weakness has been seen across the board (Stoxx 600 -1.0%); however mining names have notably underperforming amid Chinese metal prices slumping by some 5% overnight. European equity markets opened lower led by the mining sector, as base metals sell off heavily in Asia after a report saying the Shanghai exchange may raise margins on steel rebar contracts, which was later confirmed. DAX futures dip to approach 200-DMA; financials under pressure after HSBC warns low-volume environment could hit 2H revenues.

In commodities, Saudi Arabia Energy Minister Al-Falih stated the possibility for the continuation of output cuts is on the table and if the size of cuts needs to be adjusted, this will be examined and subject to approval by 24 countries. North Korea vows to mercilessly wipe out the provocateurs, says the US will suffer a shameful defeat, according to North Korean state media. IEA raises 2017 global oil demand forecast to 1.5mln BPD vs. 1.4mln BPD global oil supply rose by 520k, while OPEC compliance fell to 75%.

In currencies, safe-haven support for the currency has continued as USD/JPY made a brief break below 109.00 overnight. Although, with the war of words showing no signs of stopping, JPY might make a push back to the April low at 108.11. So far, the pair has traded in a narrow range with investor focus for the USD shifting to the US inflation figures due out later in the session. AUD softened in Asian trade as commodities prices slipped. Crude prices fell over 0.5%, despite Saudi Arabia and Iraq’s announcement to ensure that all major producers comply with the OPEC production cut, while Saudi also left the door open to deeper cuts. Additionally, Chinese iron ore prices fell some 5%, further weighed on the currency, subsequently pushing AUD to the mid-0.78.

OUTLOOK

Looking at the day ahead, the main focus will be its inflation stats for July, with expectations at 0.2% mom (for core) and 1.7% YoY. Onto other events, the Fed’s Kaplan and Fed’s Kashkari will also speak today.

TRADERS VIEW

The Bloomberg Dollar Spot Index was little changed and the euro was lower versus the greenback as investors awaited the release of the U.S. inflation data later Friday. Even though there was escalation in the war of words by Trump, currency havens stayed in relatively tight ranges, possibly due to reduced positioning after the latest washout.

EURUSD – The common currency was 0.1% lower at 1.1755 as of 10:06 a.m. London time amid muted flows. While investors failed to react to inflation readings out of the euro-area countries, they may prove more sensitive when U.S. data take center stage.

USDJPY – The pair briefly erased its Asia-session losses after London open yet revisited its day low at 108.91 as EURJPY selling weighed; a drop below 108.83, will market the weakest level since April 20.

GBPUSD – The pound may see its second weekly decline, for the first time since March, as U.K. data provide little ammunition to sterling bulls. Rallies above 1.3000 are seen as a selling opportunity by leveraged investors.

USDCHF – The Swiss Franc gained versus all of its peers except for the Yen, although within ranges of less than 0.3% against most of them.

USDCAD – The CAD has reached an important level at 23.6% Fibonacci Retracement level at 1.2740, which connects the highs of May and Lows of July. The Morning Session showed the pair trading above it, only to encounter some selling pressure and move back lower.

Dow Jones – The negative momentum on the Dow Jones has been set as the break below the 21,900 and reaching 21,800 proves that the sellers are now in control.