"The duty of the president to propose, the privilege of Congress to dispose"FDR

After the dreadful storms that battered Houston and the storm that continues to brew over the nuclear test by North Korea, it would appear America is having to brace itself once again, as another hurricane moves through the Caribbean and on towards Florida. Aside from the human effect, the economic impact can be significant as the costs for Hurricane Harvey are being estimated to be coming in close to $200bn. As Congress returns on Tuesday to debate the debt ceiling, funds needed to start rebuilding Houston may not be able to be released unless the debt ceiling is raised, according to comments from Mnuchin on Fox news. Linking the debt ceiling with Houston will probably put further pressure on Congress to come to an agreement.

One sign that nerves around the debt ceiling are being raised, the US Treasury auctioned $20bn by selling 4-week treasury bills on Tuesday. The yield they had to offer 1.3%, the highest since 2008, higher than the current yield on the 2-year Treasury. Under normal market conditions and in today's interest rate environment an investor would expect a few basis points lending to the treasury for such a brief period.

Consequences of North Korea’s actions seem to be moving away from the threat of a nuclear strike to an increase in tensions between China and the US. President Trump wants to increase the pressure on North Korea by introducing further sanctions against the country, and proposing that America should not trade with anyone who does business with North Korea. China is North Korea’s closest ally and commercial partner. According to US figures, last year trade between China and North Korea totaled over $500bn. Russia is likewise taking a contrary position to America believing that current sanctions have not provided any solution so far. Pyongyang must be having a collective wry smile as they seem to be uniting Russia and China against the US. Trump also appears to be making “frenemies” with South Korea as he is apparently considering scrapping the trade deal based on their response to the increase in tension.

US equity markets were shut on Monday and therefore were unable to react to the events over the weekend. The rest of the global equity markets response was muted on Monday. When US equity markets did reopen on Tuesday there was something of a negative response as the four leading indexes all fell over 1%. The Vix index reflected this increase in tension rising almost 30% on the day. Short term bills may not be in demand but longer dated US treasuries are, on the back of these uncertainties, as the yield on the 10-year US treasury fell below 2.1%.  

Posted on September 5, 2017 .