Investing.com | Sep 06, 2017 06:25AM ET
by Pinchas Cohen
Yesterday, global markets began the week with risk-off trading in Asia, continued with risk-on sentiment across almost all the European financial markets (up until the last 70 minutes of trading)—even as US futures and Treasuries traded risk-off—and came full circle when US trading ended the day in risk-off mode.
Today, European markets appear to be embracing risk-off sentiment along with the rest of the world as North Korean tensions reheat, a second, potentially even more destructive hurricane threatens the US and the impending American debt ceiling congressional debate takes shape.
While yesterday almost every sector in European stocks advanced, today just about all retreated.
US futures fluctuated this morning, while Treasuries edged lower, though not as a result of an increase in risk appetite. Rather, it's because of a correction after dovish comments from Federal Reserve policy makers yesterday caused bonds to surge.
While investors are bracing for an intercontinental ballistic missile launch by North Korea, they should remember that this is being billed by Pyongyang as in celebration of the country's “foundation day” on Saturday. The US celebrates Independence Day with fireworks; not to be outdone, North Korea celebrates with bigger firepower.
Indeed, it’s become the secluded country’s custom to sabre rattle around this period, though nothing has gone past the point of no return – yet. However, Kim Jong-un has never before gone head-to-head with an American president quite like Donald Trump. It's difficult to predict what may happen next, but even if nothing changes and business continues as usual next week, in the short term we can probably expect increased market volatility; in the longer-term, however, this should be considered nothing more than noise.
Still, when equity valuations are at historical highs and the US bull market is the second longest in history, any added uncertainty could be the final straw.
Fact is, market participation, including within the S&P 500, has been dwindling since June in a negative divergence to the rising prices into fresh records—and again, in contrast to the late August rise which reached less than half of one percent from the August 9th all-time-high. Additionally, should the current risk-off sentiment drag equities down another 2 percent, a major reversal—both a H&S top and crossing below the uptrend line since February 2016—will have taken place with another 10-percent decline implication.
Add to that, the lack of consensus among the US, China and Russia on how to effectively pressure Kim Jong un to abandon his nuclear ambitions. Both Russia and China are resisting implementing more punitive measures, while the US is calling for additional sanctions. It doesn’t help that China has its own, additional motives. It is North Korea's sole trading-partner, which helps China’s economy.
Investors rerouted capital out of equities and commodities—especially raw materials—and into bonds. Currencies remained flat, while the dollar edged down.
Crude oil extended its advance for a fifth day, stopped by the resistance of the August 21 peak, to what is still considered a return-move within the long-term, as represented by the falling channel since February, while it puts into question the down-trend in the medium term, as it crossed above the midterm falling channel since August 1.
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