S&P futures are slightly lower (ES -0.1%) as traders paid little attention to the latest missile test by North Korea on Friday, with shares and other risk assets barely moving, gold lower and focus rapidly returning to when and where interest rates will go up. Most global market are mostly unfazed, and the Korean Kospi actually closed up 0.4%, by the latest geopolitical escalation after a North Korean ballistic missile flew far enough to put the U.S. territory of Guam in range. European stocks edged fractionally lower while Asian shares advanced.
As reported on Thursday evening, the main overnight event was North Kore's launch of a missile which passed through Japan’s airspace and over Hokkaido, before landing in the Pacific Ocean. This initially prompted Japan to issue an emergency warning for its residents to seek shelter, while there were also reports that South Korea conducted its own missile firing test as a show of readiness. US military stated North Korean missile did not pose a threat to Guam and that the launch was an intermediate range ballistic missile. South Korean President Moon said will not sit idle on North Korea provocation and that South Korea has power to pulverize should
North Korea provoke. On Friday morning, Russia also denounced the ‘provocative’ N. Korea missile test, according to the Kremlin. Meanwhile, North Korea stated that it will take stronger actions for its self-defence if the US continues to walk on current course.
Still, markets are showing clear signs of habituation to missile launches and other provocative actions from North Korea, which has fired more than a dozen missiles this year and tested a nuclear device. Global equities climbed to a record high this week as earnings and confidence in economic growth overshadowed tensions on the Korean Peninsula. The MSCI All Country World Index is poised for its third week of gains in four. Meanwhile, recent economic data has been supporting of bullish positions, with yesterday's CPI prints suggesting inflation may again be on the rebound. While China data this week softened, the signals from DM financial markets remain optimistic. As such, investors will look to U.S. retail numbers today for more clues about the policy path.
“You have risk appetite returning in the markets more generally at the moment, so you have all these forces pushing down the yen,” said Vasileios Gkionakis, global head of FX strategy at UniCredit.
In Asia, Japan's Topix index rose 0.4% at the close in Tokyo to complete its best week since April. South Korea’s Kospi index ended 0.4 % higher after dropping as much as 0.5% in early trading following news of the North Korea launch, while Australia’s S&P/ASX 200 Index fell 0.8 percent. Hong Kong’s Hang Seng Index swung between gains and losses, and the Shanghai Composite Index was also lower.
The Stoxx Europe 600 Index edged lower as North Korea’s latest missile launch raised geopolitical tensions, although to a few lower extent than just three weeks ago and modest moves in risk-off assets showed investors are becoming inured to the provocation. In fact, USDJPY has jumped overnight above 111 and gold was down to 1,324 as few even bothered to wait for the dip to emerge before buying it.
The Japanese yen declined 0.9 percent to 111.29 per dollar, the weakest in almost seven weeks. The Japanese currency has seen its biggest fall this week in 10 months while the dollar is headed for its biggest rise since April, thanks to a revival in U.S. inflation data and bets the Federal Reserve could raise rates again this year.
At the same time, sterling surged to a post-Brexit high, taking another leg higher on Friday after BOE policy maker Gertjan Vlieghe turned hawkish and said he may support raising interest rates in the near future. Following his comments, sterling soared above 1.36 for the first time since June 2016, and was in touching distance to post Brexit highs, breaking through the September 2016 high of 1.3442.
“If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in the Bank Rate might be as early as in the coming months,” BoE member Gertjan Vlieghe said on Friday.
Vlieghe said the appropriate time for hike might be "as early as the coming months", further stating that risks remain that Brexit will have bigger impact on economy but for now wage pressures are gently building. He also stated that conditions for hike are fall in slack, rising pay pressures and household spending and robust global growth.
“The standout undervalued currency in G-10 is sterling,” Citigroup Inc. Strategists led by Jeremy Hale said in a report. “The possibility of a hike in the near term is now non-negligible and this, combined with the fact that the pound’s real effective exchange rate is close to its all-time low, could support the currency from here.”
On the other hand, as Unicredit’s Gkionakis said, “If they don’t do it (hike rates) this time, their credibility will be lost completely for the next few years.” Markets expect the BoE to move in November, he added.
Meanwhile, not even a report this morning of an explosion on a London underground train at Parsons Green station, which is being dealt with as a terrorist related incident,
The dollar stayed on the backfoot, slipping a second day amid the North Korea tensions; sterling surged past $1.35 as Bank of England policy maker Gertjan Vlieghe turned hawkish, stoking speculation of a rate increase within months. Treasuries edged lower and the yen reversed earlier gains as the geopolitical concerns faded, while the euro gained modestly as the ECB’s Sabine Lautenschlaeger said now is the time to take the decision on scaling back quantitative easing.
Overnight, the People’s Bank of China offered most cash in open-market operations since July 24 to meet funding demand. Onshore markets: the PBOC pumped in a net 200b yuan via reverse-repurchase agreements, after adding 100b yuan Thursday. The PBOC said that "injections help offset impact of corporate tax and reserve-requirement payments on liquidity." With help of PBOC’s liquidity offering, money rates have declined and will continue to do so until the upcoming party Congress, China Merchants Securities analysts led by Xu Hanfei write in note
Treasury yields rose before U.S. data on manufacturing and retail sales. The yield on 10-year Treasuries climbed one basis point to 2.20 percent, the highest in more than three weeks. Germany’s 10-year yield increased two basis points to 0.44 percent, hitting the highest in a month with its sixth consecutive advance. Britain’s 10-year yield gained six basis points to 1.294 percent, reaching the highest in two months on its sixth consecutive advance.
Elsewhere, the bitcoin crash which started last Friday following reports that China would stop local exchanges from trading of cryptocurrencies by the end of September, has acclerated, and the cryptocurrency is now down 40% from its all time highs just shy of $5,000 hit on September 1, and was trading a little over $3,000 this morning.
Today's Economic data include retail sales, U. of Michigan consumer sentiment index.
Bulletin Headline Summary
- GBP trades in Brexit night’s range, following comments from Vlieghe
- North Korea launched a missile that flew through Japanese airspace, prompting Japan to issue an emergency warning
- Looking ahead, highlight include US retail sales, industrial output and U of Michigan
Market Snapshot
- S&P 500 futures down 0.1% to 2,491.00
- STOXX Europe 600 down 0.1% to 381.32
- MSCI Asia up 0.2% to 162.62
- MSCI Asia es Japan up 0.09% to 538.66
- Nikkei up 0.5% to 19,909.50
- Topix up 0.4% to 1,638.94
- Hang Seng Index up 0.1% to 27,807.59
- Shanghai Composite down 0.5% to 3,353.62
- Sensex down 0.06% to 32,222.34
- Australia S&P/ASX 200 down 0.8% to 5,695.02
- Kospi up 0.4% to 2,386.07
- German 10Y yield fell 0.5 bps to 0.408%
- Euro up 0.03% to $1.1922
- Italian 10Y yield rose 1.9 bps to 1.767%
- Spanish 10Y yield fell 1.1 bps to 1.591%
- Brent Futures little changed at $55.46/bbl
- Gold spot down 0.2% to $1,327.57
- U.S. Dollar Index down 0.3% to 91.85
Top Overnight News
- North Korea Puts Guam in Range With Missile Launch Over Japan
- Trump Push for U.S. Jobs May Spur Boom in ‘Corporate Welfare’
- Icahn Is Said to Seek $1.5 Billion as Fel-Pro Sale Considered
- Oracle First Quarter Adjusted EPS Beats Estimates
- Alphabet Is Said to Consider Lyft Investment of About $1 Billion
- Nestle Is Said to Pay $425 Million to Buy Blue Bottle Coffee
- Police Investigate London Subway Incident as Explosion Reported
- BlackRock Hires Ex-Goldman Derivatives Trader Cho for Equities
- MoneyGram Deal Panel Is Said to Weigh Data Theft in Review: NYP
- Morgan Stanley CEO: Low Chance of U.S. Rules Overhaul: Echos
- Array Biopharma 20.9m-Share Offering Prices at $10.75 Apiece
- Facebook Plans to Open AI Center in Montreal: WSJ
- Japan Considering Tax Increase for E-Cigarettes, Asahi Says
- Credit Suisse Reaches Settlement of MassMutual Litigation
- Reps. Gowdy, Smith Ask Equifax CEO for Briefing, Documents
- Dole Food Is Said to Be Exploring a Sale, DJ Says
- China Credit Expansion Remains Robust as PBOC Maintains Support
- Google and Facebook Fret Over Anti-Prostitution Bill’s Fallout
- Trump Deal With Democrats Brings New Wall Pledge: Build It Later
Asia equity markets traded mixed after North Korea launched a missile that flew through Japanese airspace and over the Hokkaido prefecture before landing in the Pacific Ocean, which prompted Japan to issue an emergency warning for its residents and South Korea also conducted its own missile firing test as a show of readiness. This triggered a risk-averse tone across asset classes with ASX 200 (-0.7%) and KOSPI (-0.2%) pressured from the open, while Nikkei 225 (+0.5%) pared early losses as USD/JPY rebounded from its lows. Shanghai Comp. (-0.3%) and Hang Seng (+0.4%) both initially conformed to the downbeat sentiment caused by the renewed geopolitical concerns, although downside in mainland China was stemmed and Hong Kong recovered amid a firm liquidity effort by the PBoC. 10yr JGBs were higher and eyed the 151.00 level amid the mostly risk-averse tone in the region and with the BoJ present in the market for JPY 880bln in JGBs of maturities across the curve. PBoC injected CNY 120bln via 7-day reverse repos, CNY 60bln via 14-day reverse repos and CNY 20bln via 28-day reverse repos. (Newswires) PBoC set CNY mid-point at 6.5423 (Prev. 6.5465).
Top Asian News
- South Korean Markets Show Resilience After North Fires Missile
- N.Korea Says Missile Launch Normal Part of Nuclear Deterrent:NHK
- China Says Unhelpful to Unjustly Blame Others on N. Korea Issue
- Hedge Fund Farallon’s Singapore CEO to Resign After 17 Years
- China’s JD.com, Thailand’s Central Group to Venture in Fintech
- Formula One Extends Singapore Race Contract for Four More Years
- Tata Feud With Mistry Deepens With Plan to Change Holding Firm
- GM’s Record China Deliveries Mask Muted Electric Car Sales
European equities trade marginal lower amid geopolitical tensions, where North Korea fired another missile into Japanese airspace. Market reaction was minimal in Asia, led into European trade where equity markets trade with slight losses. FTSE under-performs as a result of the buoyant Sterling, as hawkish BoE comments were supported by Governor Carney and noticeable dove Vlieghe, with the former stating, the probability of a hike has definitely increased, may need to adjust Bank Rate in the coming months. European bonds trade in a tight range, with yields now slightly higher vs. yesterday across the board. Gilts have been in focus following the volatility that has been seen in UK asset classes post BoE. The UK 10y continues to trade near lows, pushed by comments from BoE’s Vlieghe, now trading through July’s lows.
Top European News
- BOE’s Vlieghe Says Rate Increase May Be Needed in Coming Months
- Axa Said to Weigh Merger for European Asset Management Unit
- Bavarian Plunges as Committee Recommends Ending Phase 3 Study
- EU Eyes Monetary Fund for Region as Political Wills Align
- HSH Nordbank Is Good Opportunity for the Right Buyer: Flowers
- Dutch State Sells Stake of About $1.8 Billion in ABN Amro
- Iceland Government Faces Breakup as Coalition Partner Quits
In currencies, the geopolitical concerns saw USD/JPY briefly spike below 110.00, as unfazed bids were stacked around 109.50, bouncing the pair 100 pips. The JPY safe-haven flow has become a concern of late, as threats against Japan could lead to flows outside of the JPY, and some traders looking for other safe haven assets. This could be indicated by the lack of aggression in the bounce in USD/CHF, with the cross remaining other the 2017 downward resistance trendline. The other notable currency move was in the pound: following Vlieghe’s comments, Cable is now in touching distance of those post Brexit highs, breaking through the September 2016 high of 1.3442, next key resistance could be at 1.3535.
In commodities, WTI trades just short of USD 50.00, as some bids have been evident as we approached the European lunch hour. Gold fell 0.4 percent to $1,323.88 an ounce. Copper increased 0.2 percent to $6,512.00 per metric ton.
Looking at the day ahead, we get numerous data releases including: IP for August (0.1% mom expected), the empire manufacturing survey, August retail sales, business inventories as well as the University of Michigan’s consumer sentiment index. Onto other events, EU finance ministers will hold Ecofin and Eurogroup meetings, the agenda includes: deepening of economic and monetary ties, developing capital-markets union, and tax and customs matters.
US Event Calendar
- 8:30am: Empire Manufacturing, est. 18, prior 25.2
- 8:30am: Retail Sales Advance MoM, est. 0.1%, prior 0.6%; Retail Sales Ex Auto MoM, est. 0.5%, prior 0.5%
- 8:30am: Retail Sales Ex Auto and Gas, est. 0.3%, prior 0.5%; Retail Sales Control Group, est. 0.2%, prior 0.6%
- 9:15am: Industrial Production MoM, est. 0.1%, prior 0.2%; Capacity Utilization, est. 76.7%, prior 76.7%;
- 10am: Business Inventories, est. 0.2%, prior 0.5%
- 10am: U. of Mich. Sentiment, est. 95, prior 96.8; Current Conditions, est. 108, prior 110.9; Expectations, est. 83, prior 87.7
- 1 Yr Inflation, prior 2.6%; 10am: U. of Mich. 5-10 Yr Inflation, prior 2.5%
DB's Jim Reid concludes the overnight wrap
Happy Friday. It wasn't so long ago that the weekend ahead would offer the enticing prospect of a couple of rounds of golf, maybe a game of cricket, a night out with the boys, watching Liverpool on the telly and then a box set and a steak on Sunday evening. Oh how things have changed. This weekend I'll be on strict duty for the regular 90 minute feeding sessions every 3 hours and around this we have two birthday parties to attend for 2 years olds. To be fair one of them is my own daughter's tomorrow (unbelievably she'll be two) but the other on Sunday possibly involves me driving my wife and Maisie there and then waiting in the car with the twins as given the big party it might not be advisable for them to be exposed to a big crowd before they've had their injections.
Oh what fun. That's not where it ends as many of Maisie's friends are turning two and my weekend diary is full for the next month attending these. My advice to the younger readers of this note is make sure you fill your weekend with every fun thing imaginable. Days like these won't last!
There's been enough going on in markets over the last 18 hours to keep my mind off the stresses of the weekend ahead. In fact there was a fairly fascinating middle few hours of the day yesterday with the BoE surprising on the hawkish side, US inflation higher than expected, North Korea trying to grab back the spotlight and halting the rise in yields, Mr Trump publicly haggling with Democrats on a DACA deal, which is apparently “fairly close”, and as the European day ended, Mr Carney admitting he was one of those leaning towards a hike as prices were going up due to a weaker currency.
Adding to this, this morning North Korea has fired off another missile that flew over Japan and landed into the Pacific Ocean. This follows their threats yesterday to use a nuclear weapon against Japan and turn the US into “ashes and darkness” for agreeing on new UN sanctions this week. The range of the test is important as the 3700km travelled is further than the distance to US controlled Guam (3400km). So it looks highly provocative. Asian markets are surprisingly taking the news in their stride with the Nikkei (+0.46%) and Hang Seng (+0.3%) higher but with the Kospi (-0.14%) and Shanghai Comp (-0.32%) slightly lower.
Elsewhere UST 10yrs have only dipped 0.5bp. So we'll see if Europe gets more stressed by the news. The UN Security Council reconvenes at 3pm NYT today so we'll see if there is an additional response here.
The North Korean headlines yesterday slightly overshadowed the US CPI numbers as they came out. After five consecutive downside misses, core Inflation surprised on the upside. According to DB's Matt Luzzetti, much of the volatility in the past two months has been due to large swings in the lodging away subcomponent, which rose sharply in August after plunging in July. Smoothing through this volatility, there are still signs that the core inflation trend is firming: the average monthly inflation rate over the past two months is 0.18%, which annualizes to 2.2%. DB still think YoY inflation for the next few months will be around current levels but that it will move higher in 2018 due to the lagged impact of recent stronger growth, recent $ weakness and tightening labour markets.
In response, the UST 10y yields initially rose c2bp intraday but recovered to close broadly unchanged at 2.186%, in part given the rising tensions with North Korea. Elsewhere, the probability of a rate hike in December has increased 4ppt overnight to 43% and is up c18ppt from recent lows (per Bloomberg calculator). On the BoE, the risks were always to the hawkish side yesterday and this is what we saw. Indeed DB have now changed their official rate call and now expect a 25bp policy rate hike on 2 November. There was no denying the signal in the MPC statement and minutes. A “majority” of committee members would support a rate hike in the near term if the economy performs in line with expectations. “All members” agree that rates are likely to rise more than the market is pricing. As Mark Wall and Oliver Harvey note there now needs to be a surprise event to push the majority away from a near-term hike. Brexit has that potential if negotiations turn disorderly. They remain skeptical about this being the start of a tightening cycle though and see consensus expectations for UK GDP growth as too optimistic. The market responded with Sterling rallying 1.42% vs. USD, 10y Gilts rising 8.5bp to 1.227% and the probability of a rate hike in November also jumping 17ppt to 50% (as per Bloomberg's calculator).
Notably, changes in other sovereign bond yields were more tempered. Core European bond yields were up around 1bp, with Bunds (2Y: +0.2bp; 10Y: +1bp) and French OATs (2Y: +1bp; 10Y: +1bp) slightly higher in yield while Peripherals rose by around 2bp, with Italian BTPs (2Y: unch; 10Y: +2bp) and Spain (2Y: +1bp; 10Y: +2bp) the highlights.
Onto other markets, US equities were mixed but little changed, with the S&P and Nasdaq down 0.11% and 0.48% respectively, but the Dow bucked the trend to be up 0.20%. Within the S&P, gains were led by utilities (+0.87%) and the real estate sector as they partly recovered from prior day losses, while the discretionary consumer and Telco names underperformed. European markets were also little changed, with the Stoxx up 0.12%, with gains from energy names being largely offset by a decline in mining stocks. Elsewhere, the DAX dipped 0.10%, the CAC rose 0.15% and the FTSE 100 fell 1.14% as the BOE got more hawkish and Sterling rallied.
Turning to currencies, most of the action was in Sterling as noted earlier. The US dollar index fell -0.43%, while the Euro/USD gained 0.29% but fell 1.13% against Sterling. In commodities, WTI oil increased 1.20%, building on the momentum from higher demand forecasts from IEA and OPEC yesterday as well as OPEC members voicing a preference to the extension to production cuts. Elsewhere, precious metals were slightly higher (Gold +0.56%; Silver +0.13%), but base metals weakened following the earlier softer than expected Chinese macro data (Copper -1.27%; Aluminium -0.67%, LME Nickel -1.41%).
Away from the markets, PM Theresa May’s big speech has been confirmed to take place on 22 September in Florence, which could provide direction or alternatively chaos to the Brexit talks. Shortly after that, the official talks with the EU will begin again on the 25th September.
Across the Pond, President Trump said he is close to a deal with Congressional democrats to permanently avoid deportation of 0.8m of immigrants brought illegally to the US as children. He noted that “we’re working on a plan for DACA (deferred action for childhood arrivals). People want to see that happen”. Notably, he is now flagging the DACA issue and his desire for a Mexican border wall to be handled separately, provided that the democrats promise not to “obstruct” it (funding for the wall) in the future.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, as discussed earlier, core inflation was slightly above market at 0.2485% mom (vs. 0.2% expected), enabling the annual rate to rise to 1.7% yoy (vs. 1.6% expected). Elsewhere, both initial jobless claims and continuing claims were lower than expectations, with jobless claims at 284k (vs. 300k expected) and continuing claims at 1,944k (vs. 1,965k expected).
In the UK, The August RICS survey revealed that on balance, surveyors continued to report a decline in both buyer enquiry and new selling instructions. Elsewhere, the final readings on inflation for France and Italy were unchanged at 0.9% yoy and 1.4% yoy respectively.
Turning to the lower than expected Chinese macro data we touched on yesterday, our China research team highlights that they maintain their baseline GDP growth forecast at 6.6% yoy in Q3 and 6.5% yoy in Q4 (Q2 was 6.9% yoy). They see no reason to panic, noting that the land market continued to boom in August which will help government revenue in H2. And if the government is concerned by slower growth, they could suspend the supply constrain on upstream sectors and increase infrastructure spending.
Looking at the day ahead, the Eurozone’s trade balance stats for July are due. Then the US will release numerous data including: IP for August (0.1% mom expected), the empire manufacturing survey, August retail sales, business inventories as well as the University of Michigan’s consumer sentiment index. Onto other events, EU finance ministers will hold Ecofin and Eurogroup meetings, the agenda includes: deepening of economic and monetary ties, developing capital-markets union, and tax and customs matters.