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Linear Talk – Macro Roundup – September 2017

By Colin Lloyd 
  • North Korean missile tests
  • Hurricane Harvey
  • Jackson Hole Symposium

There was a lull in North Korean missile tests until 26th August but financial markets paid them little heed. The Federal Reserve Jackson Hole Symposium was eagerly anticipated but yielded little forward guidance. The Euro continued to climb since Draghi failed to ‘talk it lower’. Meanwhile hurricane Harvey had an immediate impact on gasoline prices, although not WTI nor Natural Gas.

Macroeconomic effect of North Korean Missile Tests

North Korean missile tests affecting macroeconomics?

 

Stocks

If one were to attempt to divine these climatic and geopolitical developments from the performance of the S&P 500 or the Nasdaq 100 you might be forgiven for failing to spot them at all. Admittedly, the S&P VIX did spike to 17.28 on 11th, but drifted back to close at 10.59 by month end.
The S&P opened at 2,477 and closed at 2472 having made a marginal new all-time high on the 8th at 2,491. The Nasdaq ended August making a high of 6,435, a fraction below its record of July.

European stocks were more subdued, perhaps due to the strength of the Euro. The Stoxx 50 opened at 3,458 and closed at 3,444 having traded in a 39 point range during a torpid month. Closer to North Korea, the Japanese Nikkei 225 consolidated, making a post missile test low of
19,280 on 29th. Meanwhile the Shanghai Index tested its highest level since January 2016 on 31st at 3,377, amid RMB strength and Chinese bond market weakness.

Many Chinese stocks still trade on single digit P/E ratios. They look inexpensive by international standards but this is the ‘custom of the country’, it would be imprudent to anticipate a doubling in the market without government intervention to quell speculation.

 

 

Currencies

One of this year’s clearest trends has been the weakness in the US$. That trend continued last month. The US$ Index opened at 92.81 and declined to test its lowest since January 2015 on 29th when it reached 91.55.

 

EURUSD mirrored this pattern, the Euro rallying to a high of 1.2069 on 29th. Technical resistance above the market will be tested at 1.2111. The RMB has also rallied against the greenback during the course of the year. This leaves the Chinese authorities plenty of room for a retracement, should the US impose sanctions on countries that trade with North Korea.

 

Bonds

Whilst the price move in government bond markets has been moderate the trend has been in concert. US, German, UK and Japanese yields all fell during the month.

The US 10yr opened at 2.30% and closed at 2.12% – technically it looks likely to retest 1.90% at some point soon. German 10yr Bunds retreated from opening highs of around 0.55% to test 0.32% on the 29th. 10yr Gilts followed suit, trading below 1% on 29th – their lowest level this year. Even Japan was not immune, with 10yr JGBs opening at 0.08% only to test zero, and, with it, the resolve of the BoJ’s ‘yield curve control’ policy by month end.

 

Commodities

The US gasoline market responded violently to the arrival of hurricane Harvey, which made landfall on 25th August. From an open of $1.68/gl the price spiked to $2.17/gl by the 31st. Neither Natural Gas nor Crude Oil responded in kind, although they both rose moderately.

Hurricane Harvey Macroeconomic Impact

Hurricane Harvey affecting US markets?

 

Industrial metals, despite little bullish fundamental news, proved more remarkable. Copper opened at $2.87/lb but closed the month just off its $3.11/lb high – this is the highest since October 2014. Other metals were also in demand. Nickle tested $12,147/ton, its highest since July 2015, Aluminium reached $2,137/ton, a level last seen in February 2013 and Zinc rallied to $3,163/ton, a price not seen for more than a decade.

 

The catalyst for these impulsive price moves? Demand from China is the principal cause cited, yet recent economic data paints a more mixed picture. Retail sales declined to +10.1% (hardly cause for hand-wringing) but industrial output came in at +6% the weakest this year whilst Fixed-asset investment in urban areas was up 7.8%, the smallest increase since 1999.

 

You can catch the Macro Roundup, and Hedge Fund Roundup, every month alongside interviews with interesting figures from the industry on Linear talk – go to the Media tab to watch our latest videos or read our latest articles! Follow us on LinkedIn to keep up to date with everything Linear!

 

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