Just when Lil Kim thought he had the U.S. fearful, up jumped Irma to steal his thunder. Irma, you see is a Category 5 hurricane and will surely test Florida’s building codes and sorely test the reinsurers that insured the insurers. This is likely to be a tough month for both insurers and reinsurers. The insurance sector has certainly been a casualty since Harvey and that trend looks likely to continue. And just so that the U.S. now becomes used to these events another category 3 hurricane is brooding and growing in the same area that Irma was born. All in all, it could be a tough month for the southern states of the U.S.
Amidst the geopolitical turmoil that Trump is stirring up with Kim, markets are now starting to become somewhat concerned. The problem with Trump’s bluster is that it is bluster and North Korea knows that is the case. Trump once again has suggested military force, but without getting approval from the Chinese and Russians to do so, any force is unlikely unless Kim oversteps the mark and accidentally hits something. As McCain warned in August “don’t say what you cannot deliver”. And it is not as though Asia has much to fear from the U.S. as it has been relatively unsuccessful there in its campaigns.
And as Irma heads towards Miami, airlines, entertainment companies, insurers and reinsurers saw declines.
As the looming Irma descends on Florida, another looming event beckons and that is the actions of the ECB in the coming weeks. Draghi’s comments are now on the must-read list. The dovish comments sent the euro to the highest level in three years and saw money flow to buy U.S. treasuries. The euro has surged some 14% against the USD this year. The ECB is expected to comment on QE in October. It is seeing muted price growth despite the European economy growing at an accelerating rate of growth. The ECB sees price growth at 1.2% for 2018 compared to earlier projections of 1.6%. The ECB has until year end to release comments about the current bond buying programme. The more hawkish Germans are seeing the bond purchases as coming to an end.
Equities – were virtually unchanged on the day. The Labor Department Report indicating a rise in people filing for unemployment benefits rose and this helped to dampen an already soggy equity market. Brainard’s comments earlier in the week also have many analysts questioning U.S. growth. The Dow fell 0.1% the S&P 500 lost 0.02% and the Stoxx 600 gained 0.3%
Currencies – the euro gained 0.9% the strongest in three years (Bloomberg) the pound gained 0.4% and the yen rose 0.7%.
Commodities – gold rallied 1.1%, and WTI fell 0.1%. The Saudi’s announced plans to cut cruse allocations in October by 350,000 bpd. Copper fell 0.1%
Bonds – Draghi comments today stirred the bond market into a frenzy. Draghi suggested that the ECB must take into account weakening inflation due to a strong euro. The U.S. 10-year closed at 2.05% down 6.4 bp and the curve flattened slightly. The U.S. treasury market was strong with the 2-year note closing at 2.266% and the 30-year closing at 2.66%. Bonds in Europe rallied with the benchmark closes in some 4bp. The 10-year gilt closed at 0.969%, the OAT at 0.608% and the bund at 0.3%. The U.S. curve closes were 2/10 77.30 bp, 10/30 closed at 61.7bp and 2/30 closed at 139.1bp in 2.5bp. The probability of a rate hike continues to steadily fall, the probability of a hike in December 17 is now at 20.8% and the probability of a hike in June 2018 is now at 42.9% ( the highest level between now and September 2018)
Aussie Market Today.
Following Draghi’s comments and the U.S. treasury market lead, Aussie bonds should be firmer on the day. There is a chance of an equity uptick but expectations are that the equity market today will be slightly soggy as traders prepare for the weekend. Heightened geopolitical risk will also drive investor interest for bonds.