Markets Adjust To North Korean Threat, Fifth Fall In US Oil Inventories And Trump Drama

Investors absorbed a few developments that might have been disruptive for the markets with little fanfare. North Korea’s ambassador to the UK warned that his country would go ahead with its sixth nuclear test, as South Korea elected a new president who wants to reduce tensions on the peninsula.

South Korea equities fell nearly 1% from record highs, while the MSCI Asia Pacific Index rose 0.2%. The Korean won fell 0.4% and is the weakest among emerging market currencies. The dollar has pulled back against the yen. Yesterday in the North American afternoon, the dollar was stretching through JPY114.30 when the news broke and pushed it back below the figure. The dollar held above JPY113.60 in Asia, and before Europe opened, it made an attempt to resurface above JPY114.00 but met new sellers. Recall last week; the dollar finished near JPY112.70. The price action may be best understood as consolidation, perhaps encouraged by the couple basis point pullback in the US 10-year yield.  

President Trump fired the widely criticized director of the FBI yesterday. It is unusual for a president to fire the head of the FBI. The optics are horrible as the FBI was investigating the campaign’s ties to Russia. However, the impact the Administration’s economic agenda is minimal, and while the drama will continue to play out, it is a domestic political story. It still seems important to keep in mind that although Trump’s overall approval rating is low in relative and absolute terms, he continues to draw high levels of support from the Republican constituency.  

The American Petroleum Institute estimated that US oil inventories fell for a fifth consecutive week, and the 5.8 mln barrel draw down was the most so far this year. Gasoline inventories rose (3.17 mln barrels) in line with the seasonal build, while distillates stocks fell 1.17 mln barrels. June light sweet crude oil stabilized and is holding above $46 a barrel. Recall that a month ago, the futures contract was near $54 a barrel and plunged to $44 at the start of this week. The bounce is muted and needs to rise above $48 to be of technical significance.