The war of words between Trump and North Korea, has largely dictated the direction of the market for the past 24 hours. Safe havens, were the primary beneficiaries over the increased tensions, with Gold, the Swiss Franc, the Japanese Yen, and U.S. Treasuries rising across the board.

While some investors decided to take some risk off the table, the scale of the moves was limited, this is a clear sign that markets aren’t overly concerned about the situation yet. Despite the 25% surge in the volatility index (VIX), the Dow Jones Industrial Average only declined 36 points, and if Walt Disney and Boeing stocks losses were eliminated, the index would have been up 16 points.

It appears that markets are listening to U.S. secretary of state Rex Tillerson, more than Donald Trump or Kim Jong-un. Tillerson said that Americans should sleep well at night and have no concerns about this particular rhetoric of the past few days, and investors seemed to have followed his advice.

These tensions are not news to investors, as the relationship between the two countries has see-sawed for decades. Geopolitical tensions shock markets for a short time frame, until the situation settles, and if Trump scaled down his angry tweets, investors wouldn’t have reacted as strongly.

I believe that real risks of missile attacks remain low, and investors should avoid emotional reactions. However, caution is warranted, and traders should use stop losses carefully.

With stocks remaining near record highs, markets are likely to shift their attention to monetary policy.  According to Chicago Fed President, Charles Evans, the Fed should begin trimming the balance sheet in September- despite lower inflation. However, he stated that if inflation remains low, another interest rate hike should be delayed. We’ll also get to hear from New York Fed President William Dudley today, at a press briefing on employment trends and wage inequality. This makes Friday’s Consumer Price Index release of particular interest, as it could either lessen or strengthen the case for an interest rate hike in December.  Producer prices due later today, could shape up the expectation for tomorrows CPI, however, the reaction on the U.S. dollar will likely be limited.

Open FXTM account and enjoy great trading conditions!

It’s also an important day for the pound, with June’s industrial and manufacturing production, construction, and trade balances under the traders’ radar.

By Hussein Sayed, FXTM Chief Market Strategist (Gulf & MENA)

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