Asian bourses followed in the footsteps of its US counterparts and closed lower as intentions by the US government to curb tax driven company deals led to a selloff in US equity markets. Geopolitical risk is once again playing a pivotal role in bolstering US dollar strength. Following three years of resolution to remain on the sidelines, the US led strikes on ISIS in Syria could potentially change the landscape of the Middle East conflict. Unlike its involvement in Iraq, Syrian President Assad has not requested aid in fighting ISIS which brings into question the legality of foreign intervention in Syria. It is also noteworthy that the ISIS response to Saudi Arabia and four other Arab countries supporting the US that they will face violent reprisals could extend the Syrian civil war beyond its borders.
European markets shrugged off a disappointing IFO sentiment release from Germany and instead focused on ECB President Mario Draghi’s renewed pledge that the council will undertake more measures if necessary to restore growth to the euro zone as he recognizes that the recovery is losing steam. He did, however, underscore the importance that member states need to take on the responsibility to make their economies fitter as the ECB cannot carry the full weight alone. German business confidence declined to 104.7 from 106.3 in August, its lowest level since April 2013. This follows Germanys’ economic contraction in the second quarter and coupled with persistent high unemployment and stagnant growth in the euro zone has sapped sentiment for the euro. The pound has retreated after trading briefly above the 1.6400 handle and is flat on the day with the absence of domestic data. Markets await Thursday’s speech by Governor Carney on monetary policy.
As we head into the North American session, news flow is limited to the release of new home sales and two Fed speakers – Mester and Evans, to speak on policy and labor markets respectively. For the month of August, new home sales is anticipated to rise to 430,000 from July’s print of 412,000.
The Canadian dollar has been trading on the defensive due to broader US dollar strength and markets continue to evaluate commodity prices amid softening global growth expectations as copper and oil prices have flirted with medium-term lows. There is no domestic data to be released today with the exception of Deputy Governor Lane’s speech on post-crisis developments in the US and Canada which may lead to further weakness in the loonie should he mirror the themes of Wilkin’s speech on Monday that Canada will still require “some degree of stimulus” until such time that the economy returns to full capacity and to maintain inflation at its target level of 2%.
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