Markets cheer as Trump and Jong-Un extend olive branch

March 9, 2018 09:55 AM

President Trump agreeing to meet the North Korean leader Kim Jong-Un pleasantly surprised the markets on Thursday. Just a couple of months ago, the two leaders were in in a rather childish spat over whose nuclear button was bigger and hurled insults at each other, at every opportunity. Now, they are about to make history, not only with a possible reconciliation but also because this would be the first-ever meeting between a U.S. president and a North Korean leader. Investors are hopeful that there will finally be a diplomatic breakthrough.

Although relations between the U.S. and North Korea were not a major market concern, an improvement will still boost appetite, particularly in South Korean stocks. The KOSPI is the best performing Asian stock index today rising as much as 2%, before easing to 1% higher.  

The safe haven Yen declined early Friday, falling to its lowest level in a week against the U.S. dollar. As expected, Bank of Japan kept monetary policy unchanged, holding overnight interest rates at -0.1% and capping 10-year bond yields at about 0%.

Trump signs tariffs on steel and aluminum

Trump’s tariffs are no longer just a threat, they’re now official. The President followed through on his promises Thursday and signed two orders that implement tariffs on imported steel and aluminum. The good news was that Canada and Mexico were exempted. 

Commodity prices fell in Asia with iron ore leading the losers and declining more than 5%. This has limited Asian stock appreciation as miners were dragged lower. But overall, most major indices are higher for the day. 

If market participants feared a trade war, reactions would have been very different to what we saw today. Commodity prices should have been sharply lower, investors would have sold their high yielding assets and run for the safety of treasuries, gold and the yen. Given the limited market reaction to Trump’s tariffs, investors seem to believe that Trump’s actions won’t drive a full-blown trade war. However, nothing should be taken for granted, and we will have to wait for the official response from the E.U. and China. 

Draghi comments weigh on the Euro

Mario Draghi’s words had a stronger impact than the European Central Bank’s statement, which finally dropped the line that talked about the possibility of increasing the asset purchase program if the economic outlook deteriorated. The slightly hawkish ECB statement sent the euro/U.S. dollar euro/U.S. dollar (EUR/USD) currency pair to 1.2446, but the currency pair took a U-turn after Draghi started speaking.

Mr. Draghi said interest rates will remain at their present levels for an extended period of time and well past the horizon of net asset purchases, suggesting that interest rate differentials between the ECB and the Fed will remain high for a prolonged period of time. The ECB also lowered their 2019 inflation forecast and warned that underlying inflation remains subdued, which is another factor affecting the single currency.

It’s NFP day

Traders will closely watch the U.S. non-farm payrolls reports. Although hiring is expected to have picked up slightly in February and employment to have declined to 4% from 4.1%, both of these figures will be ignored. Investors are mainly concerned about the average hourly earnings figure. After increasing at the fastest pace in almost a decade, wage growth is expected to fall 0.4% YoY. If this materializes, then previous inflation fears, which caused the steep drop in equities beginning of February, are likely to ease.     

About the Author

Hussein Sayed is chief market strategist at FXTM.