Risk-off sentiment returned to financial markets this week, as rhetoric between the United States and North Korea heightened to new levels. The threat of possible armed conflict drove investors out of stocks and into safe havens like gold and the Swiss franc.
Save Havens Rise in the Face of Risk Off Sentiment
President Donald Trump’s remarks that North Korea would face “fire and fury like the world has never seen” weighed on Wall Street and drove the CBOE Volatility Index (VIX) to its highest trading level in more than a month.
A spokesman for the Korean People’s Army further raised tensions, stating it was “carefully examining” plans for a missile attack on the US Pacific territory of Guam, which has a large US military base.
Stock indices in Europe and and the United States suffered only minor losses, whilst Asian stocks were hit hardest, with the MSCI’s index of Asia-Pacific shares losing close to 2.5% on the week, with Japan’s Nikkei 225 also declining sharply.
Traditional safe haven currencies including the Swiss franc and Japanese yen rose against the US dollar, while those from emerging markets slid. The South Korea’s won (KRW) fell against the US dollar, moving below its 200-day moving average.
The Swiss franc reversed a two-week losing streak, rising over 1% versus the greenback, moving towards the 0.9600 level, after previously trading as high as 0.9770. That was its biggest daily gain against the euro since the Swiss National Bank removed its cap on the currency in January 2015.
The Japanese yen strengthened versus the greenback, moving below the psychological 110.00 level, with the USDJPY pair hitting an eight-week trading low, at 108.90.
Gold also hit its highest level in almost two months, after President Trump added to the geopolitical anxiety by boasting of the strength of the US nuclear arsenal. Spot gold gained sharply on the week, as investors moved into the safe haven of the yellow metal, moving the price of gold to $1,2888 an ounce.
RBNZ Leaves Rates Unchanged
The Reserve Bank of New Zealand (RBNZ) left the official cash rate at 1.75%, a move widely expected by financial markets, with the RBNZ also warning about the rising value of the New Zealand dollar. RBNZ Governor Graeme Wheeler said economic growth was expected to pick up in the coming months, supported by strong net migration, low interest rates and spending outlined in the May Budget. But Wheeler, who leaves the job next month, said headline inflation was likely to decline and the outlook for domestic inflation was weak.
The New Zealand dollar continued to decline against the US dollar, following Governor Wheelers speech, falling towards the $0.7250 cents level against the greenback. The kiwi has lost over 2% versus the dollar, since falling from a multi-year trading high set in July, at $0.7556 cents.
Monthly jobs openings in the US increased in June from May, the Bureau of Labour Statistics announced Tuesday. The Job Openings and Labour Turnover Survey (JOLTS) was at 6.2 million on the last business day of the month, a record high, the report from the Labour Department said. The market reaction saw the US dollar index strengthen across the board, with the euro and British pound falling sharply against the greenback.
The EUR/USD pair fell below the 1.1783 level, touching a weekly price low of 1.1689. Sterling also declined sharply, moving below the psychological 1.3000 level, hitting 1.2951 against the greenback.
Weaker than expected US PPI data raised concerns with investors, as the July producer price index came in at 0.1% for the month of July. PPI is a key inflation metric the Federal Reserve watches, and traders had been expecting the marginal increase for the month of July.
In the upcoming trading week, financial markets will follow ongoing tensions between the United States and North Korea, with top-tier economic data coming from the US, UK and the Eurozone. We see the release of second quarter GDP figures from the German economy, consumer price inflation figures for July from the United Kingdom and July retail sales numbers for the US economy.