Market concerns with North Korea missile shot over Japan seem to have faded very rapidly. This is not that surprising.
Behavioral economics suggests that people are naturally optimistic. It has to be like that for humanity to evolve as no one would ever take risks without a degree of optimism.
Extreme tail risks, such as those associated with the North Korean situation tend not to be factored into asset prices, which is a point that long-term as well as short-term investors should try to keep on their radar screen.
In this context, it could be helpful for investors the recall that North Korea's Kim said yesterday that the missile test was for Guam. Trump has warned that all options are open.
The Korean Central News Agency (KCNA) quoted Kim as saying: “The current ballistic rocket launching drill like a real war is the first step of the military operation of the Korean People’s Army (KPA) in the Pacific and a meaningful prelude to containing Guam.”
For now, the brief nature of markets’ reaction to the missile firing is very reminiscent of the events of the 1990s when similar missile lobbying took place.
Of course, one should not take the parallels too far. President Clinton had a different temperament from President Trump for instance.
The politics dispensed with, in the view of financial markets at least, the world of economics comes to the fore.
Europe gave us today a variety of inflation data releases with the Consumer Price Index (CPI) in Germany increasing to 109.40 Index Points in July from 109 Index Points in June while the CPI in Spain increased to 101.53 Index Points in August from 101.30 Index Points in July. Producer Prices in Italy increased to 103.30 Index Points in June from 103 Index Points in May while Producer Prices in Austria decreased to 99.50 Index Points in July from 99.60 Index Points in June.
Inflation in the Euro area is not low by historic norms, but it is below target as in June it still stood at 1.3 percent y/y and to that extent holds sway over the ECB’s monetary policy.
These data are not such to “logically” reinvigorate expectations of quantitative policy tightening by the ECB anytime soon.
ECB President Draghi’s rear guard action can continue, at least for the time being, defending the ECB’s relatively aggressive quantitative policy accommodation.
Besides all that, today, Moody’s released its August update, "Global Macroeconomic Outlook: Above-potential growth in advanced economies propels economic expansion."
Moody's expects a U.S. growth of 2.2 percent in 2017 and 2.3 percent in 2018, down from 2.4 percent and 2.5 percent, respectively. The revisions in 2017 are a result of weaker performance in the first half of the year. The lower growth forecast for 2018 reflects expectations of a more modest fiscal stimulus than previously assumed.
It also expects that monetary policy in the U.S. should continue to tighten this year and next while for the Euro area it expects monetary policy to become less supportive in 2018, provided that the current growth momentum remains intact.
Moody’s expect the Euro area as a whole to grow around 0.3 percentage points faster in 2017 and 2018 to 2.1 percent in 2017 and 1.9 percent in 2018, which, by the way, are both below the U.S. growth figures.
On key systemic risks, Elena Duggar, an associate managing director at Moody's commented: “A significant escalation of any of the situations in Korea, the South China Sea and other areas could have significant negative credit implications for the global economy. Other risks include a protectionist turn by the U.S., and any financial market volatility stemming from sudden changes in market expectation regarding monetary policy tightening.”
Today we get also revised second quarter GDP data with the market looking for a modest upward revision. Upward revisions should not be a surprise as the initial GDP data seems to be less and less accurate. It’s also a fact that in recent years we have seen a bias to revising data higher.
The technological changes in the global economy mean that GDP estimates are less likely to capture in full what’s going on in the real economy while there is a subsequent scramble to revise in a generally positive manner.
Etienne "Hans" Parisis is a Belgian-born bank economist who has advised global billionaires and governments on the financial markets and international investments. Parisis is based in Panama City, Panama.
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