Fundamental Analysis

CAC Slips as North Korean Tensions Weigh on Markets

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The CAC index has posted sharp losses on Friday. Currently, the index is at 5,064.50, down 0.99% on the day. On the release front, French indicators were within expectations. Final CPI came in at -0.3%, matching the estimate, while Preliminary Nonfarm Payrolls posted a gain of 0.5%, edging above the forecast of 0.4%.

Rising tensions between North Korea and the US, with threats of military action from both sides, have soured investment sentiment and pushed Asian and European stock markets lower on Friday. Investors have dumped shares in favor of safe-haven assets, such as the Japanese yen, gold and German government bonds. North Korea has vowed to retaliate over new sanctions imposed by Washington and has outlined plans to attack Guam, a major US military base. The fiery rhetoric between President Trump and North Korean President Kim Jong-un is causing alarm in South Korea and Japan, strong allies of the US. The present situation is being compared to the Cuban Missile crisis, and although military action is unlikely to take place, the crisis has reached levels where the markets cannot ignore it.

French Final CPI weakened in July, with a decline of 0.3%. The previous two readings came in at 0.0%, underscoring that the French economy continues to grapple with weak inflation levels. The inflation picture continues to worry ECB policymakers, as stronger economic growth has not translated into higher inflation levels. Inflation in the eurozone stood at 1.3% year-on-year in July, well below the bank's inflation target of 2%. Next week, the ECB releases Final CPI, and a weak reading could dampen investor confidence and send the euro lower.

The cautious ECB has consistently said that it will not adjust its asset purchases program (QE) before inflation levels move higher, but the bank may be prepared to change that view. At its July policy meeting, the bank said it would hold discussions on the scheme in "the autumn", and analysts are split as to whether that means September or October. Either way, this means that the markets expect to hear shortly from the ECB that it will begin winding down its aggressive QE policy, given the stronger economic conditions in the euro zone, even if inflation does not move higher. The bloc's economy is forecast to expand a healthy 2.0% this year, and the eurozone outperformed both the US and the UK in the first half of 2017. Another factor which policymakers must deal with is the ECB's bloated balance sheet, which stands at more than EUR 2 trillion. The Federal Reserve expected to begin trimming its huge balance sheet as early as September, and this could have a significant effect on the currency markets, as a reduction of $60 billion in the Fed's balance sheet is equivalent to a rate hike of 25 basis points.

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MarketPulse
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