Stocks are likely to come under some pressure on Tuesday that I believe could intensify near-term. Overnight, North Korea fired a nuclear weapon capable ballistic missile over Japan. Safe haven gold is gaining and U.S. equity futures indicate a lower open while volatility instruments are higher. We look at the impact of this on markets, along with other factors likely to play less important roles for securities today.
S&P 500 (NYSE: SPY) futures were lower by 0.8% at roughly 4:30 AM EDT, with Dow Jones (NYSE: DIA) futures down 0.6% and Nasdaq-100 (Nasdaq: QQQ) futures down 1.0%. The iPath S&P 500 VIX ST Futures ETN (NYSE: VXX) was indicating higher by 9.6% before the open and the SPDR Gold Trust (NYSE: GLD) was indicating it would open 1.1% higher after gaining by 1.6% the day before.
The obvious driver of capital out of risk assets like stocks and into safe haven securities like gold and silver (NYSE: SLV) is the extremely provocative North Korean launch of a ballistic missile over Japan earlier today. Missiles have been launched over Japan in the past, but they were reportedly intended for satellite launches. This was a nuclear capable intermediate range missile with no obvious purpose, save for testing of military capability. The launch was apparently an angry response to joint military drills of the U.S. and South Korea and a recent satellite launch of Japan.
Markets today are clearly expressing concern about what the U.S. response might be, both tangibly and via rhetoric from the White House. As such, and given that this escalates tensions that should remain for days, risk assets are not likely to recover by the close in my view. Likewise, safe havens in gold and silver stand to benefit for a few more days even if nothing substantive follows.
The Economic Data Slate
Economic data today is somewhat important, but severely penalized in terms of its factor weighting due to the geopolitical scare today. The data is also weighed down by speculation about the economic impact of Hurricane Harvey.
The Conference Board’s monthly reading for its Consumer Confidence Index is expected to show a moderate decrease to a still strong mark of 120.6 for August, down from 121.1. While consumer confidence is running hot, spending is only just coming along, with recently strong retail sales data. I expect consumer activity to help drive a more robust pace of economic expansion in the months ahead and through 2018. However, even the strongest of measures today should not serve risk assets immediately here, given the importance of the geopolitical factor today.
State Street’s Global Investor Confidence Index is coming off a high mark in July at 108.9. Strength was driven by a 10 point gain in North America last month. Again, like the consumer confidence measure, good news here will take a backseat to the geopolitical capital driver out of risk assets.
The S&P CoreLogic Case-Shiller Home Price Index (HPI) will be reported for the month of June today. The data follows six consecutive months of all-time highs for the National Home Price NSA Index. Economists expect the seasonally adjusted 20-city measure to mark a 0.3% gain month-to-month. On a year-over-year basis, the 20-city index is expected to mark a 5.8% price increase, versus 5.7% seen in May. We recently discussed the presence of inflation in housing in this detailed report. It’s a byproduct of strong demand and scarcity of inventory, which I expect to self-correct in the months ahead.
Key Earnings Today
Today’s earnings calendar keys on the report of Best Buy (NYSE: BBY) before the market open. Analysts see earnings of $0.63 for the electronics retailer. Strangely, considering the day’s events, reports are also scheduled for the Korea Fund (NYSE: KF) and for defense company, AeroVironment (Nasdaq: AVAV). Expect these firms to be as affected by current events on the Korean Peninsula as they are by earnings. Otherwise, the schedule includes interesting reports from Hain Celestial Group (Nasdaq: HAIN), Christopher & Banks (NYSE: CBK), H&R Block (NYSE: HRB) and Ascendis Pharma (Nasdaq: ASND).
In summary, all factors take a back seat today to the very provocative catalyst against risk assets today on the Korean Peninsula. As the market anticipates a somewhat unpredictable and possibly concerning response from the U.S. President, the tone of the day is clearly risk-off. As this issue is likely to intensify before it hopefully calms, the sell-off today could pick up steam. I see an intraday or even near-term market recovery as unlikely and recommend investors reduce risk and begin raising cash in this structurally risky period. For more of my regular market guidance, readers are welcome to follow the column here at Seeking Alpha.
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