Weekly Market Commentary August 14, 2017

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Geopolitics took center stage last week with U.S.-North Korea tensions leading to a cautious pullback across global markets and greater emphasis on safer investments. Given the ferocity of the rhetoric between the U.S. and North Korea, the market reaction seemed subdued. The S&P 500 dropped 1.4% and the MSCI ACWI slid 1.6%. The flight to safe havens pushed gold and bond prices higher. The Bloomberg BarCap U.S. Aggregate Bond Index rose 0.2% and gold climbed 2.4%.

There were relatively few economic releases this week. The job opening data was upbeat, surging to record highs, and the producer price index (PPI) slipped by 0.1% month-over-month (+0.1% Forecast). The CPI came in weaker-than-expected as well at 0.1% (0.2% Forecast). Inflation remains subdued in spite of continued tightening in the labor market.

 What are we reading?

Below are some areas of the market we paid particularly close attention to this week. For further information, we encourage our readers to follow the links:

U.S. producer prices record the biggest drop in 11 months; jobless claims rise minimally

Jobless claims remained low while edging up slightly. Producer prices were down an unexpected 0.1% in July compared to an increase of 0.1% in June. It is the worst reading in 11 months and supports the theme that inflation will remain low. The Federal Reserve inflation target of 2.0% seems quite far off at the moment.

U.S.-North Korea standoff could spark economic war with China

The escalating tension between the U.S. and North Korea may eventually lead to an economic standoff between the U.S. and China. Economic sanctions against Pyongyang have not worked as North Korea continues its efforts to develop a nuclear missile capable of striking the U.S. Critics feel that there is a need to step up pressure on China, which accounts for 85% of North Korea’s trading volume.

A Mean Reversion (For Volatility) Might Lead To A Big Migration (For Equities)

While equities trade at record highs, volatility has traded at extreme lows most of the year. The VIX has jumped 20% over the last few days based on geopolitical concerns. A mean reversion for volatility might lead to a big migration for equities.

Fun Story of the Week

Open Bubble Wrapped Objects Carefully!

Storing things that are important to us is part of being human. However, please exercise wisdom in the things you keep.  A collector of World War II memorabilia was going through a collection given to him from the possessions of a veteran who had recently passed away. In the collection, he found a live mortar shell. The bomb squad was called in and the shell was safely removed. The veteran knew there was some risk in keeping a live mortar round. Fortunately, he had wrapped it in bubble wrap to prevent any untimely knocks causing the shell to go off. Bubble wrap makes all the difference.

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