With second quarter earnings season winding down and little in the way of major new economic data, attention this week focused squarely on increasing tensions between North Korea and the United States. After the United Nations imposed its toughest sanctions yet against the North Korean regime, an exchange of bellicose threats between the “Hermit Kingdom” and the Trump administration jolted the CBOE Volatility index (VIX), a popular measure of equity market volatility often referred to as the fear index, to its highest level since Trump’s election. Virtually all major equity markets suffered losses. Most safe-haven assets such as gold, the Japanese Yen, and U.S. Treasuries moved higher, but the U.S. dollar, perhaps the most traditional safe haven, was pressured by soft inflation data.
Canadian equity markets were closed Monday for a civic holiday; but once open, they succumbed to the global risk-off environment. The benchmark S&P/TSX Composite slid 1.5%, led by information technology and health care where corporate news added to the market pressures. Energy names also experienced broad weakness. Crude oil prices fell as the International Energy Agency (IEA) cut its demand forecast, despite declines in U.S. stockpiles, a growing crisis in Venezuela, and OPEC moves to bring production in line with previously agreed targets. West Texas Intermediate (WTI) dropped 1.6%. As is often the case, the Canadian dollar fell alongside oil. The Loonie dropped a fifth of a cent to 78.8 cents U.S. after briefly peaking above 80 cents in late July. Precious metals names stood out on the upside as beneficiaries of safe haven flows. Spot silver and gold prices jumped 5.2% and 2.5% respectively. The yellow metal has now climbed 12.5% ($US) year-to-date.
Both the S&P 500 Composite and Dow Jones Industrial indexes set new all-time highs on Monday before rolling over. For the week, the S&P 500 gave up 1.4% led by resources and financials. The financial sector, while still outperforming the broad market year-to-date, is facing headwinds from lower inflation and bond yields. This week saw lower-than-expected readings for producer (PPI) and consumer prices (CPI) and unit labour costs. Aided by safe haven flows into sovereign bonds, the inflation data pushed U.S. 10-year Treasury yields down 7 basis points to 2.19%. Earnings reports continued to be responsible for top individual equity movers, both to the upside (e.g. Michael Kors Holdings, Perrigo) and the downside (Macy’s, Dentsply Sirona).
European stock markets were even weaker than North American ones, with Germany’s DAX down 2.3% and London’s FTSE 100 off 2.7%. European bank stocks, which had been rallying this year on talk of European Central Bank “tapering,” were hit hard by the drop in bond yields as North Korean tensions mounted. Major Asian markets rolled over with their western counterparts, but not before touching a new 10-year high (MSCI AC Asia Ex-Japan) early in the week. Hong Kong’s Hang Seng slipped 2.5% while Japan’s Nikkei 225, under additional pressure from the stronger Yen but closed on Friday for a holiday, dropped 1.1%.