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Europe to open higher as US stocks shrug off Korean concerns

Having seen stock markets in Asia and Europe drop sharply and the traditional haven trades rally in the aftermath of North Korea’s provocative missile launch over Japan earlier this week, it wouldn’t have been a surprise to see US markets follow suit.

Despite the escalation in tension and the universal condemnation the missile launch has provoked, US markets, despite initially opening sharply lower, rallied strongly in the afternoon session to close the day higher.

It is true that flare ups on the Korean peninsula are nothing new and previous instances have always resulted in a winding back of tension, and it would appear that US investors have decided that recent events are likely to go the same way, as the markets “muscle memory” of selling the panic and then buying the dip kicked in.

In ordinary circumstances this might seem sensible, however the events of the last few weeks can hardly be described as ordinary, which suggests that markets could be being rather naïve that current events can be contained.

Conducting missile tests are one thing but firing a missile over one of your closest neighbours is another, which suggests further twists and turns over the coming days. It is also clear that China’s ability to rein in North Korea’s young leader could be reaching its limits, as it warns that relations are now at a “tipping point.” These events certainly increase the pressure on China to stop enabling the North Korean regime and to increase the economic pressure that only it can exert on its neighbour.

Despite the rebound in US markets and a positive open this morning, Europe’s markets still look saggy, helped in no small part by the continued rise in the value of the euro, with the DAX dropping below the 12,000 level for the first time since March, while it also fell below its 200 day MA for the first time in over a year. Haven trades have continued to find support as bond prices rise sharply, while gold prices have broken above the $1,300 level for the first time since last November.

Away from the focus on North Korea and the economic damage that Tropical Storm Harvey continues to reap on the US, today’s key events on the data front are on the US ADP employment report for August, as well as the latest revisions to US Q2 GDP.

The employment picture in the US continues to remain positive ahead of Friday’s jobs report and while events at Jackson Hole at the weekend were perceived in a dovish light, this could change in the wake of this week’s data. Positive data today and later this week on the jobs and wages front will shift the focus back to interest rates policy and the September Fed meeting.

It is expected that we’ll see 186k jobs added in August on the ADP number, while Q2 GDP is expected to be revised upwards to 2.7% from 2.6%.

Before that we’ll get to see the latest lending data for the UK economy for July, against a backdrop of an overextended consumer.  We have seen some anecdotal evidence of a bit of a slowdown in spending patterns, however it’s not been particularly evident in recent data with net lending still expected to be near its highest levels this year, above £5bn.

Mortgage approvals are also expected to come in at 66k, despite July being a historically slow month in the UK housing market.

Recent economic data has pointed to a mixed picture for the UK economy, yet to look at the pound you’d think the wheels were coming off as the pound hit levels last seen in 2009 against the euro in the aftermath of the financial crisis.

When looking at events through that prism it’s fair to ask if things are really as grim for the pound, as the exchange rate suggests, or as rosy as they seem for the euro?

EURUSD – yesterday’s peak of 1.2070 was rather short-lived and has seen the euro slide back but the upside bias towards 1.2300 remains intact while above the 1.1900 area. A move back below the 1.1900 area retargets the 1.1840 level.

GBPUSD – after finding support at the 1.2770 area last week we’ve rebounded back through the 1.2900 area, briefly touching 1.2980 before slipping back. This rebound suggests the potential for a retest of the 1.3040 area in the short term. We need to hold above the 1.2880 level for this to unfold.

EURGBP – matched and exceeded the 2016 peaks at 0.9300 before slipping back a little the upward momentum remains intact with the next target coming in at 0.9415 the September 2009 peaks. Support remains down near the 0.9040 area and below that at the 0.8980 area.

USDJPY – we still have solid support down near the 108.20 area for now and April lows and this is currently containing the downside. Rebounds need to get back above the 111.00 area, otherwise we remain at risk of a move towards the 106.80 area.

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