The U.S.-North Korea showdown: Are financial markets spooked?

In today’s episode of Market Week in Review, Consulting Director Sophie Antal Gilbert discussed with Senior Investment Strategist Paul Eitelman the market impact of rising tensions between the U.S. and North Korea.

Market reaction to U.S.-North Korea unrest

Overall, markets appear unsettled by the brewing conflict, Eitelman said—both in the U.S. and abroad. For starters, the S&P 500® Index was down roughly 1.3% this week. From a historical perspective, that’s actually not a big drop, Eitelman noted, given the normal volatility of equity markets. In the face of what’s been an extraordinary period of calm lately for U.S. markets, however, “it’s a notable move,” he stated, adding that it’s the biggest weekly decline for the index since March.

Globally, markets shifted even more, Eitelman said. This was especially true in South Korea, where the nation’s market index—the Korea Composite Stock Price Index, or KOSPI—was down a little more than 3% on the week. Eitelman noted this was a natural reaction, given the proximity of South Korea to the conflict. The clash between U.S. and North Korean leaders also weighed on both emerging and European markets, he said.

Despite all this, Eitelman stressed that the situation hasn’t escalated to a point yet that would lead him and other Russell Investments strategists to downgrade their U.S. or global economic outlooks. “It is a dynamic situation, and things could quickly change,” he said, “but for the time being, our broader market forecasts are unchanged.”

U.S. inflation numbers for July: More of the same

Switching to inflation, Eitelman said that the recently released U.S. core inflation data for July was the most important economic data point of the week. The July numbers remained weak, he said, making for five straight months of softer-than-expected data—the second-worst such period since the 1960s. “It’s a notable slowdown in core inflation,” Eitelman observed, noting that the numbers continue to run consistently below the U.S. Federal Reserve (the Fed)’s 2% inflation target.

While Eitelman doesn’t believe the weakness in inflation will affect the Fed’s likelihood of beginning to wind down its balance sheet next month—an announcement that is widely expected at its upcoming September meeting—he does think it could have an impact on a potential interest rate hike in December. Eitelman and his team believe that the persistent weak core inflation data, coupled with a slew of mediocre economic growth factors, will prevent the Fed from raising interest rates through the remainder of the year.

Drop in German industrial production

Turning to Germany, Eitelman discussed the decline in German industrial production: The country experienced a 1.1% dip in industrial output in June, according to its Economy Ministry. While this was below consensus expectations, “it’s important to zoom out and look at the second quarter as a whole,” he said. Doing this shows that German industrial production actually increased 5%—“a really strong outcome,” according to Eitelman. In his and other Russell Investments strategists’ viewpoint, when looking out across a full set of economic indicators—both in Germany and the Eurozone—the macroeconomic fundamentals have been quite strong. In short, “they are supportive of good equity market performance across the Eurozone going forward,” he concluded.

Watch the video.