Summary:

  • Markets wobble, gold rises as Korea overshadows European politics
  • Gold prices rebound from the key $1295 zone
  • New Zealand’s dollar weakest in G10 as politics weighs on business sentiment

Monday was mainly about the politics on the markets. Let us recall that investors first reacted to elections in New Zealand and Germany – in both cases we saw disappointment as the ruling parties saw deterioration in support and coalition forging is set to be difficult. In New Zealand we still have to wait for overseas votes which will prolong the process and may undermine a position of the ruling party further. In Germany where Grand Coalition lost a combined 14 percentage points in favour of Afd and FDP a so called Jamaica coalition seems to be the only chance for Angela Merkel if she wants to avoid early elections. Coalition forging may take a lot of time and weigh on European markets (we presented a broader analysis here). It’s becoming nervous in Spain as well as separatists from Catalonia look set to hold independence referendum on Sunday even though Madrid says it’s illegal and is taking measures to prevent it. 

Despite many political plays it was North Korea that stole the show once again as its foreign minister said the US declared a war and his country had a right to shoot down any airplanes even outside of its zone. Let us recall that the US took its bombers close to the North Korean border as a response to the latest nuclear tests that were carried out by the Korean regime (this in turn was a response to the latest slate of UN sanctions). Pyongyang was apparently surprised by this mission as the aviation was not tracked by its radars. Moreover president Trump declared a “total destruction” of North Korea at his UN speech should Kim Jong Un attack US or any of its allies. Quite clearly we are looking here at an escalation of tensions and it’s easy to imagine how things could spin out of control. Normally markets recover from such news rather quickly and it’s been partly the case this time as well (especially on Wall Street) but should we get some kind of incident (imagine missile hitting Guam or the Japanese territory) markets could be in for a much deeper pullback. While Pentagon claims the US has 4 to 5 ways to deal with North Korea experts fear that any preemptive strike is out of question as North Korea could attack Seul immediately.  

Gold was one of the beneficiaries of this rise in uncertainty and the help arrived just in time for the gold bulls. A price was testing the key $1295 zone after a long correction that saw the trend line broken and it looked like the last line of defense really. Therefore a strong rebound from that zone could encourage buyers again although do notice that they have the trend line that could act as a resistance now. 

link do file download link

Gold prices rebounded from the key zone and fight to keep upwards trend alive. Source: xStation5

Overall the session in Asia was subdued. The Japanese Nikkei225 (JAP225 on xStation) slid 0.3% as the yen gained and the Chinese indices were little changed after a major pullback on Monday (it was a result of curbs on the property markets in the Chinese cities). On the fx front the NZD was under pressure again, down 0.3% against the US dollar and 0.5% against the yen as Business Confidence index plummeted from 18.3 to 0 pts.! This could mean that prolonged political uncertainty could weigh on the kiwi for a while. 

Tuesday’s calendar is mostly about the US, we have data on home sales and consumer confidence but eyes will be on Janet Yellen who’s scheduled to speak on inflation and monetary policy.