When I had heard Saturday about the North Korean missile launch, and watched the rushed joint statement of President Trump and Prime Minister Abe that was broadcast on YouTube, I thought for sure there would be a flight to safety trade as soon as the futures opened Sunday afternoon.
I couldn't have been more wrong. I thought for sure that gold, the Swiss Franc, and possibly the Yen and the Dollar Index futures would be up substantially. I also thought that the Nikkei futures would be down. Here's what actually happened:
- Gold futures gapped down slightly, trading down to an overnight low of $1225.50, and trading even lower in the intraday session to $1220.30. Gold futures are at this very moment trading around the price level that they opened at this morning.
- Swiss Franc futures gapped down, filled the gap but then traded down in the intraday session. Futures are currently trading below the overnight low.
- Yen futures gapped down significantly at the overnight open; and although they made a run for it, have yet to fill that gap.
- Nikkei futures gapped up, failed to fill the gap and closed the intraday session above the overnight highs.
- The one thing I got right: Dollar Index futures did indeed gap up, filled the gap but traded back up again to an intraday high of 101.11.
Additionally, one would have thought the U.S. indices would have shown signs that investors were spooked by the weekend development. That didn't turn out to be the case as all the major indices, and the corresponding futures, hit 52 week intraday highs.
In hindsight it all makes sense. Kim Jong-Un must have thought that he would be raining on the Trump/Abe parade (given the timing of the test). Instead, the gesture fizzled as President Trump softened from his campaign rhetoric and reaffirmed the U.S. commitment to Japan as "100%". The world recognized the stunt for what it is, another attempt by the North Korean regime to shake-down the global community. Kim's attempt to rattle the new President and the mettle of the Japanese-American relationship simply galvanized the nascent relationship between the American President and the Japanese Prime Minister and allowed them to project a convincing image of strength.
In a strange way, the timing of the test could not have worked out better for Prime Minister Abe. Although there may have been discussions about the weakening Yen at some time on Friday or Saturday, that talk was easily overshadowed by the North Korean nuclear test. Considering the tweets that the President sent out over the weekend, praising the couple and what a great time they were having, it was reasonable to come away with the impression that any confrontation regarding the Japanese regime intervening to deliberately weaken its currency in order to boost exports, would simply be tabled for the foreseeable future.
As such, the Yen futures traded down Sunday afternoon, which is simply a continuation of the current trend. The Dollar Index futures strengthened, not so much I suspect as a flight to safety; but again, as a continuation of the current trend. Gold futures declined as the Dollar rallied. Equities markets ignored "that guy" making a scene in the corner, and turned their attention back to the tax-reform punchbowl. "Inhibitions" continue to be shed as evidenced by a CBOE Volatility Index (VIX) that continues it's downward move (a less fearful market). However, the bullish partygoers are growing nervous; Ursa, the host of the party, is looking at the clock with increasing frequency (as evidenced by the late-day rally in the VVIX, the CBOE index that tracks the volatility of the Volatility Index).
When will the punchbowl be taken away? It's difficult to say, but I suspect that this week will be giving us some very important clues. I'll be paying attention to what the Yen and the Dollar do this week, along with gold and oil futures. I don't believe there's any question about whether U.S. equities indices will continue to climb. Rather, the question is, "By how much and with how much confidence?" I'll also be paying attention to the VIX, but more importantly to the VVIX. If the VVIX reverses course sharply, I am sure that the VIX will be quick to follow. If so, and if this reversal is confirmed, the so-called "Trump" rally may be in for a few speedbumps.