North Korea rattles Asian markets, but key focus remains the Fed

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European and US equity gauges are moving lower after Asian markets were rattled by North Korea firing missiles into the Sea of Japan, while markets continue to price in a rate rise by the Federal Reserve next week, particularly following the latest comments from Fed chief Janet Yellen.

Kit Juckes, a macro strategist at Société Générale, says:

The markets are locked, loaded and ready – a move is priced in, near-unanimously expected by forecasts, who on balance now also agree with the Fed’s projection of three moves this year.

But with last week’s CFTC data showing record shorts in [the US] 10-year note, the market is also heavily positioned for a move. Hence, with North Korea lobbing missiles into the Sea of Japan this morning, we have a slightly risk-averse start to the week, with 10-year note yields back under 2.5%, the Nikkei weaker and the Yen strongest of the major currencies. Markets may be in a standoff for the next few days.

Hot topic
US index futures suggest the S&P 500 will fall by 10 points to 2,373 when trading gets under way later in New York.

The March S&P contract fell swiftly in early Asian trading after Pyongyang sent four ballistic missiles into the ocean. Those tests initially dented South Korean stocks by 0.5 per cent, but the Kospi later recovered to trade up 0.2 per cent as investors noted the actions by the North were just the latest in a ling line of provocations. The Korean currency remains under pressure, however, weaker by 0.4 per cent to Won1,155.97 per US dollar.

The fall in US equity futures also came as traders got the first chance to react to news that president Donald Trump has accused the Obama administration of tapping his phones in the run-up to November’s election.

James Clapper, the top US intelligence official from 2010 to 2017, on Sunday said there was no wiretap of Mr Trump or his campaign during his tenure.

After Wall Street hit a record high last week, partly it was claimed on the back of Mr Trump delivering a more “presidential” speech before Congress, the latest brouhaha is seen giving investors the opportunity for some more profit-taking after the bull run.

Forex
The US dollar is mostly firmer after last week, coming within about 2 per cent of a fresh trade-weighted 14-year high on surging expectations that the Federal reserve will tighten policy next week.

The CME Group’s FedWatch tool sees a 79.7 per cent chance the central bank will raise interest rates by 25 basis points on March 15, the probability having more than doubled in recent weeks following supportive economic data and hawkish comments from Fed officials.

The dollar is up 0.2 per cent against the euro at $1.0595 and is adding 0.2 per cent versus sterling to $1.2267. The Australian dollar is shedding 0.2 per cent to US$0.7581, despite data showing Aussie retail sales returned to growth in January.

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