Korean tensions come closer to boiling point

Despite the apparent threat of nuclear annihilation (as some media sources would have you believe) markets were relatively calm and sanguine yesterday. The US dollar remains stronger against both the euro and sterling although lingering selling pressure courtesy of the FBI investigation into Russia’s ties to Trump could keep a modest cap on further gains. The real winners from the simmering tensions on the Korean peninsula are the Japanese yen and Swiss franc – two tried and tested safe haven currencies.

While barbed and thorny communications aren’t rare between the two nations at this time of year (August marks the annual joint military drills held between the USA and South Korea), it seems to have taken a slightly nastier turn with tangible intelligence emerging that Pyongyang now have nuclear capabilities and will have a plan to strike Guam ready in the coming days. Whether this tension will last or ebb away as it has in recent years is anyone’s guess, but there’s not much further that relations can be strained before troops are mobilised and markets will really begin to take notice. Should relationships sour further, it’s only a hop, skip and jump away from businesses worldwide being forced to consider the ramifications for supply chains, insurance contracts and shipping routes. But we hope we won’t have to pursue that train of thought any further.

Latest economic indicators expected to inch forward

June’s UK industrial & manufacturing production numbers are released alongside trade balance at 0930BST today. The figures should continue to show the economy stayed, at best, flat at the end of Q2, serving as another reminder that the UK economy is still far from the rebalanced, diversified business community that politicians have been promising for decades (remember the Northern powerhouse?). As such, the relevance and contribution of these figures to overall economic growth will remain low and that will limit, but not prevent, any reaction in sterling.

Coming second in the pecking order is June trade balance. While still running a trade deficit of over £3 billion per month, it’s certainly been moving in the right direction. Juiced exports courtesy of the weaker pound have nudged this figure higher over the past few months, but the lack of any redirection of wholesale purchases to domestic suppliers has prevented imports from following suit. This is likely a symptom of the globalised nature of the UK economy, meaning domestic suppliers simply don’t exist, and not just a feature of stubborn UK industry; a problem that’s certainly not solved overnight.

US producer prices due

Producer price inflation is always looked over by both markets and the Federal Reserve – pertinent inflationary pressure is far more immediate and tangible when facing the consumer and not industry – but PPI numbers are often the first place you see the exchange rate having an impact on prices. This was the case for the UK post-referendum and it’s beginning to be seen in US figures given the depreciation of the dollar since Trump’s ascension to office. As a result, PPI is seen running higher than CPI today, at a rate of 2.2% per year.