August has historically been one of the worst performing and volatile months of the year for stock markets. This month, however, started with many investors living in la la land, as seen by extremely low volatility and extremely high complacency despite high valuations and mounting political uncertainty. It’s been clear for a while that it wouldn’t take much to upset the apple cart, it’s been more of a question of which event and when?
On Tuesday, the S&P 500 finally broke out to a new high to confirm the one recently set by the Dow. That may have been the last hurrah for the bull market as both indices then turned downward to complete bearish key reversals, but the Nasdaq and Russell 2000 failed to confirm in the first place.
Market sentiment has changed dramatically overnight, sparked by mounting tensions with North Korea. The Hermit Kingdom snapped back in focus Tuesday on reports the country has developed a nuclear bomb small enough to fit onto a missile. U.S. President Donald Trump threatened “fire and fury” if North Korea threatens the U.S., while North Korea indicated it could attack the U.S. island of Guam, which has a military presence.
Following a slow start during yesterday’s North American trading hours, market reaction to this development picked up sharply during the Asia Pacific trading day and has continued around the clock.
In stocks, the Nikkei plunged 1.25% overnight, while this morning the DAX is down 1.4% and the FTSE is down 0.8%. France’s CAC is down 1.6% on reports someone drove into a group of police officers in Paris. U.S. index futures are down 0.25%.
In currency markets there has been a definite shift in capital flowing into defensive havens. Gold has broken out over $1,260, while the Japanese yen has rallied against USD (breaking under 110), EUR and GBP. CHF has also been rallying this morning. EUR is in retreat, but GBP Cable has stabilized near $1.3000.
The loonie is down slightly against USD but could be active through the day on swings in the oil price. WTI has been trading higher since API announced a 7.8 mmbbl drawdown in its weekly oil inventories. With Baker Hughes reporting a decline in the rig count last week, unusual at this time of year and the EIA trimming its U.S. production growth forecast, expectations of strong U.S. production growth are looking increasingly overblown. Oil may remain active through today’s DOE inventory report where a 2.0 mmbbl drawdown is expected. Traders may look to the DOE for confirmation that the US supply/demand situation continues to come back into balance and that the big build from earlier this year is being unwound.
It’s another busy day for earnings news with the main focus in the U.S. this week still on small- and medium-sized companies. We also could see some action in the entertainment sector today. After the close last night, Walt Disney (NYSE:DIS) produced another mixed report. The House of Mouse beat the street earnings but missed on sales with networks and the studio underperforming expectations. Disney also announced it is ramping up its sports video streaming services with an ESPN-branded service to launch early in 2018. Perhaps more importantly, Disney also announced it plans to pull all of its content off of Netflix (NASDAQ:NFLX) and launch its own streaming service in calendar 2019. Shares of both Disney and Netflix have been falling in the aftermarket on this news. With Netflix having been one of the top performing stocks of recent months, this news could have an impact on sentiment toward momentum plays.