On this day in 927, the Saracens conquer Taranto
The rhetoric between North Korea and Donald Trump eased on Monday and this effected a rally in equity markets. Leaders are often accused when times are tough at home of escalating geopolitical tensions elsewhere in the world to boost their standing in the polls. If Donal Trump had any expectations that his domestic unpopularity may have been boosted by an aggressive stance to North Korea the political press would suggest otherwise. We shall see if the “fire and fury” reaction, goes down well with the average American, but political advisors believe this was just the reaction Pyongyang wanted to further stoke the US versus them view within North Korea. On top of this Donald Trump’s reaction to the events in Charlottesville along with his comments on threatening attacks on Venezuela appear to leave him more isolated than ever.
The latest Merrill Lynch fund manager survey has central bank policy mistake as the biggest tail risk, followed by a crash in the global bond market. Bringing up the rear North Korea or possibly geopolitical risk in general. The first two are linked one would suggest, as investors fear an unexpected move by a central bank will lead to a sharp fall in bond prices, a la 1994. Fund managers don’t appear to fear that tightening monetary policies could curtail growth which could, in turn, lead to a flattening of the yield curve. One suspects the bond market may have been trying to signal this possibility from the start of the year. Perhaps it is interesting that nowhere in the survey is Donald Trump considered as a tail risk to equity markets.
The latest UK inflation data for July, not unsurprisingly as far as we were concerned, came in below expectations for the second month in a row. Core inflation remained at 2.4% as the month on month inflation rate fell 0.1% in the month of July. Producer input prices were flat month on month, however, output prices rose by 0.1%. Later, Wednesday we get average earnings for the month of July. Earnings are rising slower than inflation which has had the effect of squeezing consumers, hence the falling savings rate.
The latest news as to the strength or otherwise of the US economy on Tuesday provided some good news. Retail sales, rose 0.6% in July ahead of expectations. Business inventories also rose in the month of July and the New York State Manufacturing Index rose to the highest level in nearly 3 years. In reaction to this, the US dollar rose and bond prices fell.
The Citi economic surprise index, which records how economic reports come relative to expectations, having slid off a cliff in the first half of the year, has stabilised and even seen something of an uptick. Interestingly on the most recent previous occasion, we saw a similar fall in economic outcome v expectations, in 2015, equity prices only corrected as the data improved.