Markets taking geopolitical tensions in their stride

Markets taking geopolitical tensions in their stride; Service PMI’s in focus

Whilst equity market across Europe finished the previous session in the red, they managed to pick themselves up off session lows before the closing bells. At the end of the day the losses were fairly measured, which indicates that financial markets were taking the latest escalation in geopolitical tension in their stride. Clearly there are nerves out there, but looking at Asia overnight, we saw the markets mixed, with the Hang Seng actually managing to book a positive finish. This is despite news flow suggesting that North Korea was preparing to test another intercontinental ballistic missile before Saturday.

So, while investors may be ready to put some risk back on the table, this is not happening at the expense of safe haven assets quite yet. Safe havens have so far retained their shine this morning. Gold continues to trade around its highest level for almost a year at $1340. Putting this into context, the last time gold traded at these levels was when news of President Trump’s victory shook the markets. Safe haven currencies the Japanese Yen and the Swiss Franc both also continue to be in demand. However, as a whole the market’s reaction is in line with a rational outcome to the recent escalation, this is not the first time we have been here and judging by recent media reports it won’t be the last time either.

PMI’s in focus

The economic calendar on Monday was rather quiet with just UK construction pmi’s catching the eyes of investors. The data showed that construction sector growth unexpectedly declined to a one-year low, mainly due to a slowdown in investments in the commercial sector. Of note housebuilding was the only construction sector which generated significant growth during August. This bodes well for the house builders which will be under the spotlight for the remainder of the week as Barratt Developments reports its full year figures Wednesday and Bovis Homes is set to release its figures on Friday.

The construction sector data was firmly in contrast to a strong manufacturing pmi last week. However, these sectors are marginal in comparison to the dominant service sector, which accounts for almost 80% of the economy. The service sector will be under the spotlight this morning as investors await the pmi. Recent service sector data has been soft and the expectation is the service sector expansion will soften again slightly in August to 53.5 from 53.8 in July.  Whilst the pound bears are lining up there could be some hope of a better than forecast reading after the BRC retail sales figures, released overnight, beat expectations jumping from 0.9% in July to 1.3% in August as the effects of back to school spending become apparent.

This morning sees a barrage of August service sector pmi’s released from mainland Europe – Spain Italy, Germany and France are all expected to provide solid readings, before attention will shift to the latest revision of the eurozone 2^nd quarter GDP figures.

Strong Chinese service sector pmi’s overnight could serve to boost the miners out of the blocks this morning.  Should this be the case, then the FTSE could find itself reasonably well supported in the morning session. 

US Fed Speakers take to the airwaves

Tuesday sees the US return to its desk following the extended Labour Day weekend break. The economic calendar for the US is quiet this week compared to its bumper hit last week. Instead the focus on Tuesday will sit squarely on Federal Reserve speakers hitting the airwaves. Speeches from Fed governor Leal Brainard, Robert Kaplan, the Dallas Fed President and Minneapolis Fed President Neel Kashkari – all of whom are voting members of the Fed sat on the Open Market Committee will be keenly awaited on Tuesday. Investors will be looking to asses how stronger than expected economic growth but weaker than forecast labour market data may influence the Fed’s monetary policy moving through towards the end of the year