OREANDA-NEWS. August 16, 2017. Belligerent rhetoric between the U.S. and North Korea commanded investor attention last week, pushing everything else to the side, at least temporarily. With earnings season, mostly complete, a light economic calendar, no central bank meetings and the U.S. Congress in recess, the heightened geopolitical tensions were enough of a concern to knock stocks off their stride and provide a lift to other, safe-haven assets.

The S&P 500 slid 1.4 percent, its worst week since late March. That selloff was modest compared to the 3.2 percent decline in the South Korean Kospi index, which has fallen 5.2 percent over the past three weeks. Overall, the MSCI World index shed 1.7 percent for the week in local currency terms. Conversely, treasuries gained on the news, as the yield on both the ten and two-year notes fell seven basis points, to 2.19 percent and 1.29 percent respectively. Gold rallied $30, or 2.4 percent, to $1,289 an ounce. The VIX index of implied S&P 500 volatility surged to its highest level since the election. And the yen and Swiss Franc climbed against the dollar.

A Slow Trading Season puts a Spotlight on Geopolitical Risk

The blustery talk subsided over the weekend, and as trading gets underway this week many of these risk-off trades are reversing. Stocks in Asia were generally higher, with the notable exception of Japan where markets were closed on Friday, and despite reporting faster than expected second quarter growth. Equities in Europe are higher as well, as are U.S. futures. Treasury yields are edging higher, gold is retreating, and the dollar is a little firmer.

The intrusion of geopolitical risk into the market’s psyche arrives at a time on the calendar when its impact is likely to be magnified somewhat. Of course, international tensions are serious business, especially so between nuclear powers. But with little else in the realm of market fundamentals to focus on, and with repeated reminders of the historical seasonal weakness in August and September, some nervous selling shouldn’t be a surprise. And it could linger. A couple of days of relative quiet and some renewed buying are certainly welcome, but do not necessarily mean that the situation has been defused.

Economic Data and Earnings this Week: What to Watch

The economic calendar in the week ahead does include enough to at least partially recapture investor attention. The Fed releases the minutes of its July meeting, which may shed a little more light on how it views stubbornly low inflationary pressures, and whether that is enough to alter its presumed intention to begin unwinding its balance sheet in September, and to announce another rate hike in December. Last week the Consumer Price index (CPI) showed that prices remained subdued in July. Both the headline and core rates rose by 0.1 percent, less than expected, leaving them both with a twelve-month increase of 1.7 percent, below the Fed’s target.

July retail sales will provide the latest insight into the consumer. Sales are expected to have risen following two months of declines. Housing starts and building permits, as well as the National Associate of Home Builders (NAHB) index are expected to show steady, if unspectacular conditions. And the same is expected for industrial production, leading indicators, and consumer sentiment. On the policy front, negotiations over the Northern America Free Trade Agreement (NAFTA) treaty begin.

While Japan was reporting faster economic activity, the latest round of data from China indicates some slowing in July. Across the board, retail sales, fixed investment and industrial production were all softer than expected to start the second quarter.

In the U.S., second quarter earnings season is now more than 90 percent complete, and Factset projects 10.2 percent year-over-year growth. Scheduled to report this week in the retail space are Wal-Mart, Home Depot and Target. Dow component Cisco is also scheduled to report this week.