Risk aversion has returned to dominate the markets with a vengeance with all three ‘safe-haven’ currencies, the US dollar, Japanese yen and the Swiss franc rising strongly yesterday and world stock markets going in the opposite direction as fears that the US and its allies are poised to take military action against the Syrian government rise.
Yesterday, US Vice President Joe Biden said that there is "no doubt" that the Syrian government used chemical weapons and it must be held accountable. The Syrian government has always denied it used chemical weapons and said the US military will fail if it launches an attack against the country whilst UN weapons inspectors are expected to return to a site in Damascus near where a suspected attack happened last week.
In the UK, the Confederation of British Industry (CBI) reported yesterday that the services sector in the UK grew at its fastest rate in business volumes since 2007 in the three months to June this year with optimism about business conditions in the consumer services and in business and professional services climbing by 28% and 36% respectively.
CBI Director of Economics, Stephen Gifford said "We’ve seen a further build-up of momentum in the service sector this quarter, with business and professional services firms in particular seeing a turnaround in their fortunes. Confidence has risen strongly across the board, and the outlook is positive in the short-term. But consumer services firms are a bit more worried about the longer-term, and have scaled back their investment and expansion plans."
The dollar received backing on the rise in risk aversion yesterday despite some worse than expected US economic data. The S&P/Case-Shiller latest report on the US housing market showed that whilst US house prices rose by 2.2% in June, growth was down from the 2.5% growth rate reported in May.
In the euro zone, the euro received further support from a rise in German business sentiment in August as the euro zone's biggest economy continued to show signs of improvement with the Ifo indexes, based on a survey of 7,000 German executives beating the consensus estimates.
The pick-up in the Germany economy has helped to lead the euro zone out of an 18-month long double-dip recession.
Oil prices have benefited from the rising tension in the middle east, giving support to petro-currencies like the Canadian dollar whilst the Dow Jones index in New York has now fallen to a two month low. In addition, the VIX index in Chicago, a measure of risk used in the markets grew by 11.87% yesterday.
Some secondary data due out today so analysts suspect that the main market drivers will continue to be risk sentiment as the Syrian situation unflds.