Market Review – Fundamental Perspective 26 September 2017

Safe havens consolidated their rally as risk sentiment soured overnight after North Korean Foreign Minister Ri Yong-Ho described President Donald Trump’s recent comments as equivalent to a declaration of war. This spurred a modest flight to safety with relatively muted declines among Asian equities and UST yields, which were down by 3bp. In FX, EURJPY sold off aggressively, having been a favourite risk on expression of late, taking EURUSD lower through key support at 1.1880 overnight .
In data yesterday, Germany’s business climate index IFO came in 0.7 points lower at 115.2 for the second consecutive month, but still remains around the highest levels on record
The slowing down of the IFO supports Barclays Research’s view of a “slight moderation… in the growth activity of the German economy in H2 17” which could also be influenced by political uncertainty after the General Elections and the subsequent coalition debate.
We expect political uncertainty is likely to remain elevated in the coming weeks, with New Zealand’s National Party and Labour Party also going into negotiations with other parties to try to form a coalition government.
Later today, US Fed Chair Yellen will deliver keynote remarks on inflation, uncertainty and monetary policy. We expect her speech to be largely in line with the press conference remarks after the FOMC meeting. We think she will reiterate that inflation expectations are what matters in determining future inflation and that unusually low inflation this year does not mean that it will continue next year. Nevertheless, we expect her to balance these views by admitting that the FOMC still needs to figure out how much of the current softening is transitory versus persistent.

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