After North Korea celebrated its National Foundation Day without testing a missile, focus today shifts to the United Nations Security Council vote on further sanctions.
Hurricane Irma is expected to be the most expensive storm in US history.
The weekend missile test to celebrate North Korea’s founding anniversary, which was anticipated by experts on the region, did not take place. Focus shifts to the United Nations Security Council vote later today on whether to add sanctions, including an oil embargo on North Korea. It is unclear how North Korea might react to sanctions, if any. While an extreme outcome or accident cannot be ruled out, in our view, the risk of military action remains low for now. Should the situation escalate, the USA’s next move might be to put more pressure on China to intervene as China remains central to resolving the crisis.
Following a US threat to cut trade ties with countries that deal with North Korea, a lack of cooperation from China could damage US-China relations, potentially leading to trade sanctions against China, e.g. exports. Concerned investors should hedge against this tail risk by adding protection but be ready to deploy cash when the crisis eventually de-escalates.
Hurricane Irma, referred to as “a storm of enormous destructive power” by President Donald Trump and known as the most expensive storm in US history, hit Florida on Sunday. In the near term, the asset volatility related to hurricanes is likely to remain high, as the extent of the damage is highly uncertain.
Historically, market volatility related to hurricanes tends to stabilize relatively quickly after two to three weeks, once most of the infrastructure is back online. Hence, price moves in related commodities and equities are most likely going to be driven for a week or two by Irma and Harvey news flow.
As Irma is likely to hit refineries more than production facilities, WTI crude oil suffered another fall on Friday. Hurricane-specific news might remain an important driver for a few more weeks, but thereafter less so, as the market could soon start to focus on fundamentals again. This shift will be determined by the pace at which refineries come back online.
China released its CPI and PPI figures, which rose 1.8% YoY and 6.3% YoY respectively, higher than consensus expectations. The CPI remains well below the People’s Bank of China’s (PBOC) 3% target. On Friday, the PBOC removed the 20% reserve requirement for trading foreign currency forwards as it attempts to combat CNY strength, which traded to a four-month high against the USD.
We expect the CNY to stabilize ahead of the 19th National Congress, which opens on 18 October. In Europe, the market focuses this month on the UK House of Commons vote on the European Union (Withdrawal) Bill and the elections in Norway and Germany.