North Korea Back in Focus. Brexit Breakthrough. ECB Issues Warning.

by 29 Nov, 2017

Stock Markets
In Asia this morning, indices generally shrugged off the latest missile test from North Korea. The DPRK made headlines globally after it fired a new ICBM that landed in the Sea of Japan yesterday.

Tensions over Korea had reached boiling point in late summer, but the regime had been far quieter in recent months. The spectre of conflict on the Korean Peninsula had seemingly fallen by the wayside especially in the press, with more attention being focused on President Xi Jinping’s consolidation of power in China.

However, now that the DPRK has launched a test missile with a range of over 8,000 miles, the situation is more serious than ever before. Trump said to reporters earlier, “We will take care of it… it is a situation that we will handle”, but the fact remains that North Korea has now become a legitimate threat to the US mainland and its enemies in East Asia (Japan, South Korea).

Despite this, most stock markets in Asia edged higher, with the TOPIX up +0.79% and Shanghai’s SSE Composite falling, then regaining 30 points by the time markets closed. The index has struggled to make headway since October. Prakash Sakpal, Asia economist at ING said, “The markets seem to be more immune than in the past to North Korea’s missile testing.”

Brexit Talks Make Progress
Reports are surfacing which say the UK has agreed on a final ‘divorce’ settlement with the European Union. All throughout the year, pro-Brexit members of Parliament contested the idea that the UK owed Europe significant sums, but it seems the government has conceded that a payment of over €50 billion is due.

How the money will ultimately be distributed is unknown, but this is represents a step forward and concrete progress in negotiations after months of stalemate. The Pound is rising off the back of the news against both the Euro and Dollar, thanks to renewed optimism that a deal can be struck between the EU and UK. Now they just have to settle the Irish border issue and tackle trade talks, both of which will help businesses feel more confident about the future if they are handled correctly.

Elsewhere in Europe the DAX leads indices at the top, gaining +0.75% at 13,158.86. The FTSE lags.

Later Today
We get brand new US GDP data for Q3. A strong reading is likely to boost the US Dollar and will allow for some quick profit taking. This morning the greenback sat lower against the Pound and slightly higher against the Euro, which has since reversed (see chart below). Consensus points to a rise in quarter-on-quarter GDP to 3.2% from 3.1%.

Today’s Chart


ECB Warning


The European Central Bank warned today that it has concerns about a possible ‘global market correction’.

In its latest Financial Stability Review report for November, the ECB praised ‘Improved economic conditions’ in euro area financial markets, but warned that global risks may trigger financial asset market corrections with negative repercussions on financial stability.

The bank cited signs of ‘increased risk-taking behaviour in financial markets’ as a factor that may lead to asset price corrections. From what we know already, they could be right.

Surveys indicate that a large number of investors think stock markets are overvalued, though they are still choosing to take on high levels of risk. Bank of America Merill Lynch’s fund-manager survey this month (which includes over 200 people who manage $610 billion) shows a record number of survey respondents are taking higher-than-normal risk, at a time when US stocks are close to their highest valuations in history. Overconfidence here could be dangerous. The data indicates investors are feeling emboldened at a time when they should be more cautious.

The ECB’s data indicates that global asset price volatility is pretty low compared to recent years, thanks to a rebound in global growth and accommodative monetary policies in advanced economies (like the Fed and ECB with their QE programmes). The issue is that a period of relative calm in financial markets could lead to complacency from investors, on top of the fact that central banks are now withdrawing their stimulus programmes.

They note that investment funds are increasingly engaged in higher-risk activities, moving their asset allocation towards lower rated and higher-yielding assets in recent years.

For the full report, click the link in paragraph 2. The former head of the ECB, Jean-Claude Trichet, also warned of similar concerns, which you can read in section 2, here.

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