War of words is pushing up the cost of insuring South Korean debt. North Korea's test of the Pukguksong-2 missile in the undated photo released by the Korean Central News Agency (KCNA) in Pyongyang February 13, 2017. Photo: Reuters/KCNA
War of words is pushing up the cost of insuring South Korean debt. North Korea's test of the Pukguksong-2 missile in the undated photo released by the Korean Central News Agency (KCNA) in Pyongyang February 13, 2017. Photo: Reuters/KCNA


1. Jaw-jaw, sell-sell

An unnerving war of words between Washington and Pyongyang has pushed the cost of insuring South Korean debt against default to its highest in 1-1/2 years and the expected volatility of the Korean won is creeping higher. Gauges of market risk have been rising but are far off their peaks as the expectation still is that diplomacy would prevail and prevent a nuclear conflict. But investors are increasingly jittery and some are wondering what other threats to the benign environment in markets may be lurking below the radar.

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2. Shooting higher

Immediate winners as tension ratcheted higher over the Korean peninsula were US defence industry stocks. Raytheon, maker of the Patriot anti-missile system notched up an 8% gain for the month on the day of President Trump’s “fire and fury” warning, slightly outperforming Lockheed Martin, the Pentagon’s No. 1 weapons supplier. Overall, defence stocks on the Dow Jones Industrial Average are up about 4.3%, more than twice the gains of the wider index.

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3. The dollar difference

The dollar’s nearly 9% fall this year has exposed a stark divergence of fortunes between US companies with high international sales and those that rely on domestic revenues. Goldman Sachs’s basket of US stocks with high domestic sales (which includes Wells Fargo, Charter Communications, Altria) is up 4% so far this year, significantly underperforming the S&P’s 9% gain. Their index of stocks with high international sales (including McDonald’s, Tiffany, Qualcomm, NVIDIA, Boeing), has forged ahead, up 14%. Among S&P stocks, almost 30% of total revenues are generated overseas, according to Goldman. Earnings season is wrapping up with S&P earnings estimated to increase 11.9% – which would mark the first consecutive increase over 10% since the second and third quarters of 2011. An above-average number of companies are beating analyst expectations, according to Thomson Reuters I/B/E/S data. Still, data from market research platform Sentieo shows that dollar mentions in earnings were on balance weighted negative in the month to Aug. 9, with 388 transcripts during the month seemingly mentioning a foreign exchange effect in a positive way and 455 with a negative bias.

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4. Trade tested

Talks in the coming week between the United States, Canada and Mexico on updating/renegotiating/ditching (depending on who’s talking) the North America Free Trade Agreement come at something of a crossroads for world trade. Trump’s campaign pledge to renegotiate or ditch NAFTA raised concerns in many countries about a re-emergence of protectionism and an unwinding of the globalisation that supporters say has lifted millions of people out of poverty. The latest trade figures from China, Germany and Britain were all much weaker than forecast, raising worries over the level of demand in major economies as central bank take steps towards tighter monetary policy. What happens next may depend on whether the dollar stays weak. Most trade is in dollars and a weaker US currency makes financing such operations more attractive. Oxford Economics has plotted the inverse relationship between the dollar and world trade and find that trade is growing at its fastest rate since 2010.

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Global Trade: not so bleak if dollar weak

5. Getting there

The euro zone economy outperformed both the United States and Britain in the first half of the year. Economists polled by Reuters expect growth of 2.0% in 2017. But Germany’s slowing trade has raised questions about the strength of demand in leading economies just as central banks consider scaling back their stimulus programmes. Gross domestic product data from across the bloc due in the coming week will be closely watched. German flash second quarter growth is expected to pick up to 0.7% from 0.6% in the first three months of the year. Overall, euro zone economic activity is forecast to have expanded by 0.6%, the same as in Q1. Italy is picking up – its Q1 GDP growth was revised up to 0.4% from an initial 0.2% and that strength is expected to have been maintained in the three months to end-June.

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