World markets took
a beating overnight at the news of multiple missile tests conducted by
North
Korea. In a move that aggravated just about
everyone but Kim Jong-il, North
Korea fired at least six test missiles into the Sea of Japan, including a long-range missile capable of
hitting US and Australian soil. Despite the missile tests showing extraordinary
North Korean aggressiveness, especially on Independence Day, the long-range
missile was a spectacular failure, only staying in the air for 42
seconds.

The reaction of
the markets to the missile tests was swift and broad-based, but they had made
back some of the losses by close. The Nasdaq ended 1.7% down at
2153.34, the biggest loss in over three weeks, while the S&P500 Index and
the Dow Jones both lost 0.7% to be 1270.91 and 11,151.82 respectively at
close.

As is par for the
course for geopolitical tension, the North Korean missile tests pushed the price
of crude oil up, touching US$75.40 for the first time since the
Iran tension of April.

The appropriate
response to the North Korean aggression is currently being designed, but Henry
thinks economic sanctions, which have been bandied about, will have limited
impact on the already impoverished communist regime. The CIA World Factbook
puts their GDP at a measly $40 billion, less than the amount Warren Buffett
donated to charity last week.

The latest tension
throws another curveball at US economic architects. The latest
reading

of the ABC News/Washington Post Consumer Index showed US consumer confidence
rose to -9 on a scale of +100 to -100. Analysts consider moderating petrol
prices are the main driver behind the improving consumer confidence. However,
the overnight oil price rises once again raises the prospect of $3-a-gallon
petrol.

The release of the
first round of second-quarter earnings will also put the US Fed on notice.
According to Reuters,
71% of the S&P500 companies that have already reported have shown
earnings to be above expected, and expectations are for 12% growth once
all companies have reported. This would make the 16th straight quarter of
double-digit gains for the S&P500 companies – an indication that the Fed may
continue with their policy tightening for some time
yet.

More reading at
Henry Thornton.

Peter Fray

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