Flare-ups on the Korean peninsula are fast becoming a weekly occurrence and while financial markets remain nervous about the potential for the next dangerous conflagration, each escalation on the part of North Korea seems to elicit a milder market reaction than the previous one.

Equity markets did slide back yesterday, but the declines were modest as were the gains in the Swiss franc, and Japanese yen, while gold did manage to get within touching distance of its highest levels in nearly a year, before closing off its highs.

It’s almost as if what has been unfolding on the Korean peninsula in recent weeks is desensitising markets and becoming more like background music for investors, with an occasional ramping up of the bass the only reminder that a wider crisis or conflict could take hold quite quickly.

The role of China is certainly going to come under much greater scrutiny given last weekend’s events, particularly its role in keeping the lights on in North Korea.

North Korean President Kim Jong Un has always had a tendency to push his luck, only this time he may have pushed it too far in embarrassing his closest ally in China, however it seems unlikely at this late stage that China will be able to influence North Korea even if it was able to do so, which means we can probably expect to see the bass on the background music get ramped up again in the coming days, as the US, South Korea and Japan mull a response at the UN.

On the economic data front it was a fairly quiet day yesterday with the only data of note coming from the UK as the latest August construction PMI slipped back to a one year low of 51.1 with new orders particularly weak, though housebuilding remained strong.

The weak construction number contrasted with last weeks continued improvement in manufacturing and as such makes today’s services PMI number that much more important, given some of the recent softness seen in recent surveys here.

In July we saw a nice uptick to 53.8, after a bit of a slowdown in June, and it is expected that we might see some softening in August back to 53.5, though it wouldn’t be a surprise if we did outperform, particularly in areas that support travel, leisure and tourism. Overnight the latest BRC retail sales monitor showed a nice pick up in August to 1.3% from 0.9% in July as holiday and back to school spending provided a boost. It was also a significant improvement on the August numbers last year, though some of the improvement was as a result of a rise in prices rather than an increase in sales.

Overnight we also saw a decent improvement in the latest Caixin services PMI from China, coming in at 52.7, a big improvement on July’s 51.5.

Later this morning we have the latest August services PMI’s from Spain, Italy France and Germany and after a solid performance so far this year and some really good July numbers we could also see some softening of the data here as well, though it is still expected to come in at fairly decent levels.

Expectations are for readings of 56.9, 55.5, 55.5 and 53.4 respectively while later in the day the latest EU Q2 GDP numbers are expected to be confirmed at 0.6%.

US markets will also be returning from their long Labour Day weekend break, which will see the first reaction to last weekend’s events in North Korea, while investors will also be looking for clues from a number of Federal Reserve officials about what might be around the corner when the Fed meets later this month, with some speeches from the dovish Lael Brainard, who is a permanent member, as well as the Dallas Fed’s Robert Kaplan and the Minneapolis Fed’s Neel Kashkari, who also leans to the dovish side and who dissented on the last rate rise.

Of particular interest will be the respective FOMC members views on the outlook for inflation, as well as any indications as to thinking on a timetable for balance sheet reduction where it is widely expected we’ll get more details later this month in terms of timings and amounts.

EURUSD – the failure to move back above the 1.2000 level last Friday could well suggest we’ve seen a short term peak with a move back towards the 1.1820 level, and a break targeting the 1.1600 area. Above 1.2000 retargets the 1.2070 peaks.

GBPUSD – bias remains to the upside while above the 1.2850 area with resistance at the 1.3040 area. Longer term support remains at the 1.2770 level but we need to push through 1.2980 to keep the momentum intact.

EURGBP – the break of the 0.9180 area opens up the risk of a move back towards the 0.9040 area, and a short term peak. It would take a move back through the 0.9230 area to stabilise and retarget the 0.9300 area.

USDJPY – still in a range with 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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