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Investors Try to Remain Hopeful for Peaceful North Korean Solution

Investors Try to Remain Hopeful for Peaceful North Korean Solution

By    |   Tuesday, 17 October 2017 09:19 AM

Politics has created the odd trimmer in financial markets overnight with North Korea’s deputy UN ambassador Kim In-ryong telling the UN general assembly’s disarmament committee that a nuclear war may break out any moment, adding: “The entire U.S. mainland is within our firing range and if the US dares to invade our sacred territory even an inch it will not escape our severe punishment in any part of the globe.”

It might be interesting to remember that on Sunday, the Secretary of State, Rex Tillerson, said that diplomatic efforts aimed at resolving the North Korean crisis “will continue until the first bomb drops”.

Now, this is not likely to be a serious challenge for markets. Markets do not price in extreme negative scenarios until they happen. It is a quirk of human behavior to be biased towards to be optimistic.

If war does break out, and the situation in Iraq for instance is rapidly escalating, then markets will price in that risk. This means for instance that there is upside to the oil price in coming weeks with Brent moving to around the $60 per barrel zone but we are unlikely to see markets price in supply disruption from the Korean peninsula.

A smattering of central bank speakers hit the newswires today.

Departing ECB Vice President Constâncio is scheduled to speak today and there is some interest in his remarks given the ongoing speculation about what specific kind of quantitative policy tightening that the European Central Bank (ECB) will implement at some time in 2018.

Constâncio is probably not the best central banker for enlightening markets and investors however.

Philadelphia Fed President Patrick Harker of the Fed will also give a prepared speech today at noon.

There is speculation now about who President Trump may nominate Fed Chair.

John Taylor, who favors a rules-based approach being reportedly be a more viable candidate than was previously considered.

A rational observer might contend that a rules-based approach to policy is one of the least desirable forms of central bank policy at a time of rather considerable structural upheaval in an economy.

However, rationality is unlikely to play that greater role in the selection process, but it’s also unwise to read too much into speculative newswire stories.

The UK has Bank of England Governor Carney will be testifying to the House of Commons as UK consumer price inflation comes out.

The Bank of England is expected to be the next central bank to tighten policy with a rate increase forecast for the start of November, effectively reversing the emergency rate cut of September 2016.

Inflation is a motive for that policy shift, but not perhaps the main motive. The just released consumer prices data moved in line with expectations in September. A 0.3 percent monthly increase was enough to nudge the annual inflation rate a tick firmer to 3.0 percent, its second successive rise and the first time that this level has been touched since April 2012.

Carney is also likely to be questioned about the Brexit divorce proceedings.

In this context we got yesterday’s UK Prime Minister May having dinner in Brussels with the European Commission President Jean-Claude Juncker yesterday that resulted in a statement that was as meaningless as, well as meaningless as EU statements normally are.

The statement reads: “As regards the Article 50 negotiations, both sides agreed that these issues are being discussed in the framework agreed between the EU27 and the United Kingdom, as set out in Article 50 of the Treaty on European Union. The Prime Minister and the President of the European Commission reviewed the progress made in the Article 50 negotiations so far and agreed that these efforts should accelerate over the months to come.”

About the ongoing Iranian question, it reads something more interesting: “They discussed their common interest in preserving the Iran nuclear deal.”

Economic data releases today are not especially exciting.

There is U.S. industrial production, but as the slogan “Make America great again” implies that America is not that great at manufacturing now as it remains a relative small part of the U.S. economy.

As reported by the National Association of Manufacturers, in 2016, manufacturing accounted for 11.7 percent of GDP in the economy.

The service sector is the relatively more important part of the U.S. economy of course.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Markets do not price in extreme negative scenarios until they happen. It is a quirk of human behavior to be biased towards to be optimistic.
markets, price, panic, negative
Tuesday, 17 October 2017 09:19 AM
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