Fears over rising geopolitical uncertainty and another strong hurricane due to land in Florida weighed on market sentiment last night. 

US equity indices fell around 1% on Tuesday after a public holiday break, as investors absorbed and reacted to the shock from North Korea’s nuclear test and the renewed wave of sanctions. 

US treasuries and gold extended gains in the hunt for safety. The gold price surged to its highest level since the November election, closing above the US$1,336 mark for the first time in nearly 12 months. The gold price has technically broken out above the resistance level of US$1,336. Its next major resistance level can be found at the US$1,369 area (123.6% Fibonacci extension level).

Hurricane Harvey has already brought a negative impact to the US economy and the temporary impact to the jobs market cannot be ignored. The arrival of Hurrican Irma could potentially further dampen the economic outlook in the near future, and with it the likelihood of a December rate hike.

Federal Reserve Governor Brainard expressed cautious views on interest rate hikes, stating that underlying inflation remains weak and it would be prudent to raise the federal fund rates more gradually. She also said that the economic effects of Hurrican Harvey ‘raise uncertainties about the economic outlook for the remainder of the year’. 

The probability of a December rate hike, according to the CME’s Fedwatch tool, fell from 42% to 36% in a day, reflecting the market’s dovish view on monetary tightening. The US dollar index fell nearly half a percent to the 92.2 area. 

The impact of geographical tension surrounding the Korean peninsula on the Singapore stock market is likely to remain limited to the sentimental level rather than the fundamental, if the US can eventually resolve the issue diplomatically. Investors consider this a good excuse for profit taking, offloading some positions after a near-eight-month rally in the local stock market. The fundamental impact to Singapore’s economy and foreign investment is likely to remain limited.

If the tensions escalate further and eventually trigger US military intervention, then we will have to carefully assess the changes in ‘political equilibrium’ in the region, and potential impact to trade and businesses. The stand-off on the Korean peninsula is undermining the US-China relations which represent a centrepiece of Trump’s foreign policy.

Technical Analysis:

Dow - Cash

  • Testing 23.6% Fibonacci retracement level at 21,760
  • 10-Day Simple Moving Average sloped downwards
  • SuperTrend (10,3) remains in bearish set-up, suggesting bearish momentum dominates
  • Momentum indicator MACD continues to trend downwards, in line with the bearish trend

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