Venezuela tension heats up

Instreet Market & Economic Commentary and Opinion

Forget the war of words taking placing over North Korea, eyes are turning to the crisis unfolding in Venezuela. That includes the eyes of President Trump who it seems wouldn’t rule out military intervention. This comes despite the US skipping the recent Lima meeting between 12 countries from the American continents, which gave the market the impression the US would take a back seat when it came to sorting out the issue.

Venezuela is a country rich in oil which exports mainly to the US. Any disruption to that supply will prompt the price of oil to rally globally and affect the share price of energy companies.

Trump is also paying close attention to China, announcing his first major trade action against the country. It will begin with an investigation into intellectual property rules that Beijing uses to force foreign investors to turn over valuable technologies.

This move comes as the US feels less than pleased with China’s response to the issues in North Korea. It is also in keeping with the America First policy. Interestingly, the policy has stumbled recently thanks to the lower US Dollar which is helping increase the competitiveness of US manufacturing.

Expect less tweets from the US president towards North Korea going forward and the market focusing on other issues.

Inflation effects

Headline inflation in the US ticked up to 1.7% from 1.6% in June, which was less than many had expected. That said, it is still significantly less than its peak of 2.7% in February.

While falling inflation has clearly provided a boost to Treasuries this year, it has also been a boon for the S&P 500. By taking the heat off the US Federal Reserve (the Fed), it has eased concerns about the effects of tighter monetary policy on equities and contributed to a more competitive dollar.

Inflation is expected to rebound in early 2018 for several reasons including the weaker US Dollar; a faster rise in wages as the labour market tightens; and the fading influence of transitory factors.

The risk for inflation remains on the upside and the Fed needs to get ahead of the curve. With a tight employment market, a weak US Dollar and risk to the price of Oil on the upside, the most likely outcome is that the Fed will raise rates quicker than the market expects.

We expect President Trump will continue to post Tweets aimed at keeping the US Dollar lower.

Don’t mention the war

Of course, today’s post wouldn’t be complete without a summary of North Korea. The market appears completely unphased by the situation with the S&P500 down only 1.4% for the week, Europe down 2.7% (Stoxx 600) and the ASX200 almost flat at 0.50% for the week.

Since World War II there have been several other instances when the US has been on the brink of a war that did not break out. Similarly, these situations had little lasting effect on the markets either.

We are working on the assumption that there won’t be a war between the US and North Korea and don’t think people need to panic. It will be interesting to see if North Korea becomes disappointed with a lack of Trump attention if he turns his focus to the challenges in South America.

 

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