“Financial markets think the only realistic option for the U.S. and North Korea will be to sit down and talk at some point because other options are too costly for everyone involved. But no one can rule out the risk of accidents. Markets think the chicken game will continue for now and North Korea will remain a risk.”
- Masayoshi Kichikawa, chief strategist at Sumitomo Mitsui.
Following last night's "unprecedented" North Korea missile launch over Japan, which was a clear taunt to Donald Trump, the biggest moves this morning are not to be found in South Korea, where the Kospi index closed Tuesday just 0.2% lower after falling as much as 1.6% as local BTFD spirits were ignited late in the session, or in Japan where the Nikkei pared much of its losses to end down 0.5% as the BOJ bought a few billion more in ETFs (but not before hitting a 4 month low), but across developed markets where the Euro finally surged above the "profit crushing" psychological barrier of 1.20, sending European stocks reeling to 6 month lows as exporters, mostly in Germany, were slammed. The VIX was up over 20% in early trading, jumping 2.42 vols to 13.74.
None other than chancellor Angela Merkel commented on the Euro this morning, and when asked about the impact of the euro’s rise on Germany’s trade surplus, says it’s a simple fact that the euro’s exchange rate has an impact on terms of trade. “I don’t decide about the euro’s exchange rate”: Merkel says at news conference in Berlin. Clearly that's Mario Draghi's responsibility. “Personally, I don’t see the trade surplus as so dramatic” she added. We'll see if German investors agree.
“The market is still digesting Draghi’s comments from Jackson Hole and the U.S. outlook is looking difficult with concerns around the budget and a looming shutdown,” said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.
World stocks tumbled and safe-haven assets jumped on Tuesday on worries the North Korea situation could devolve into an all out military conflict. S&P futures fell as much as 0.7% to the lowest in more than seven weeks. The European STOXX 600 index fell more than 1% to a six-month low.
North Korea military tensions also sent both European, Japanese and US Treasury yields tumbling, with the 10Y Bund down to 0.33%, the lowest in two months, the 10Y Treasury tumbling as much as 2.10%, the lowest in 10 months, and the benchmark JGB sliding back to Japan's target of 0.0%. The risk off tone has spurred a broad flight into other safe-havens, with JPY, CHF and gold surging higher.
Some of course, tried to spin the overnight news: “the North Korean escalation has triggered a significant risk-off move,” Alessandro Balsotti, head of asset management at JCI Capital Limited, said in his daily note to clients. “However ... observers believe it won’t be enough to trigger a material reaction from the United States-South Korea axis. It wouldn’t be surprising, then, if investors take advantage of this geopolitical fear to buy the dips.”
Meanwhile, equities dropped and volatility surged across the globe in classic risk-off moves, with U.S. stock futures also tumbling, down 17 at pixel time. Japan called Kim Jong Un’s latest provocation an “unprecedented, grave and serious threat.” Gold surged to the highest this year, while the Swiss franc and the yen were the best-performing major currencies.
In Europe, the Stoxx Europe 600 Index sank 1.5% to the lowest in almost seven months, as the EURUSD crossing 1.20 has spooked investors, worried that exporter profits are about to be wiped out. In the UK, the U.K.’s FTSE 100 Index declined 1.3% to the lowest in 16 weeks on a closing basis ahead of grueling, and chaotic, Brexit negotiations. Germany’s DAX Index decreased 1.7% to the lowest in more than five months, led by sliding exporters.
As Bloomberg writes,
Tuesday’s launch thrust the confrontation between the U.S. and North Korea back to the fore after the hermit kingdom had been praised by Secretary of State Rex Tillerson last week for its “restraint.” Tillerson said that North Korea hadn’t carried out “provocative acts” since the UN Security Council imposed new sanctions earlier this month, and that Pyongyang’s temperance might lead to negotiations “in the near future.” Kim Jong Un last tested a missile on July 28.
Oops.
“Some observers had thought the U.S. and North Korea were pursuing discussions behind closed doors, but it turns out North Korea continues to pursue missile development,” said Chihiro Ohta, a Tokyo-based senior strategist at SMBC Nikko Securities. “The risk-off stance is likely to continue even if the U.S. responds calmly.”
The dollar was down 0.6 percent at 108.63 yen after hitting its lowest level since mid-April despite Japan’s proximity to North Korea. Also the safe-haven Swiss franc strengthened, with the dollar falling 0.6 percent to a one-month low against the Swiss currency. Across EM, Predictably, Russia’s ruble (due to ongoing Harvey-related oil price woes) and South Korea’s won (for obvious reasons) led losses among emerging-market currencies after North Korea fired a ballistic missile over Japan on Tuesday, damping appetite for riskier assets. The Ruble falls 0.6% against dollar, most among 24 major peers tracked by Bloomberg as oil price weakens 2nd day. The South Korean won fell the most in 2 weeks, even as the Kospi wiped out most trading losses to close only 0.2%.
Meanwhile, in its now traditional mirror response to the sliding dollar, the Yuan climbed for the 10th consecutive day, rising above 6.60 to a new 14-month high. Both onshore and offshore yuan extend gains against dollar to beyond 6.60 and to strongest for both since June 2016; in onshore markets, the CNY was up 0.14% at 6.5920 vs USD, climbed 0.7% overnight, the most since Jan. 17, after the PBOC strengthened the fixing for a second day to 6.6293 from 6.6353. The Yuan was the best performer among 11 Asian currencies tracked by Bloomberg over past month, gaining 2.1% vs U.S. dollar.
In rates, bund futures opened higher and extended the recent rally, with 30y yields breaking below 1.10%. US Treasuries outperformed, with price action pointing to stops on the break below 2.10%, the lowest level since mid-November. Curves bull flatten as swap spreads snap wider, in typical risk-off fashion after North Korea fires missile over Japan. Germany’s 10-year yield decreased five basis points to 0.33 percent, the lowest in two months. Britain’s 10-year yield declined six basis points to 0.992 percent, the lowest in almost 11 weeks.
Meanwhile, gold prices jumped 0.85% to $1,321 an ounce, hitting its highest level in more than nine months and rising for a third straight session. The metal also drew support from uncertainty surrounding the Trump administration after remarks last week raised fears of a government shutdown.
Crude oil bounced back on the back of supply disruptions in Colombia and Libya, a day after U.S. crude futures dropped on worries that refinery shutdowns caused by flooding could boost inventory. WTI crude futures rose 0.26% to $46.69 a barrel after falling to as low as $46.15 in the previous session. Gasoline price, which surged as much as 7 percent to a two-year peak of $1.7799 a gallon on Monday, traded at $1.7263 in early Tuesday trade as storm Harvey picked up strength again after inundating refineries along the Texas coast.
Today's economic data include Conference Board Consumer Confidence Index for August. Bank of Montreal, Bank of Nova Scotia, Best Buy and H&R Block are among companies reporting earnings.
Bulletin Headline Summary from RanSquawk
- Tensions on the Korean peninsula rises after N.Korea fires a missile over Japan.
- Risk off tone spurs flow into safe-havens with JPY, CHF and gold surging higher.
- Looking ahead, highlights include Fed’s Evans and API Crude Report
Market Snapshot
- S&P 500 futures down 0.8% to 2,423.90
- STOXX Europe 600 down 1.4% to 366.98
- MSCI Asia down 0.1% to 160.27
- MSCI Asia ex Japan down 0.5% to 528.40
- Nikkei down 0.5% to 19,362.55
- Topix down 0.2% to 1,597.76
- Hang Seng Index down 0.4% to 27,765.01
- Shanghai Composite up 0.08% to 3,365.23
- Sensex down 1.2% to 31,370.01
- Australia S&P/ASX 200 down 0.7% to 5,669.01
- Kospi down 0.2% to 2,364.74
- Brent futures up 0.2% to $51.80/bbl
- Gold spot up 1.1% to $1,325.06
- U.S. Dollar Index down 0.6% to 91.661
- The VIX is up 2.42 to 13.74
- German 10Y yield fell 4.8 bps to 0.328%
- Euro up 0.6% to $1.2052
- Italian 10Y yield fell 2.0 bps to 1.789%
- Spanish 10Y yield fell 2.4 bps to 1.577%
Top Overnight News
- Kim Jong Un’s rattled Asian markets as the U.S. and its allies weighed a response to Kim Jong Un’s latest provocation.
- South Korean President Moon Jae-in ordered a show of force in response to North Korea’s ballistic missile, with four F-15K jet fighters conducting bomb-dropping drills.
- Tropical Storm Harvey drifted into the Gulf of Mexico, poised to recharge before crashing ashore again Wednesday on the Texas-Louisiana border.
- Buyout Firm Leonard Green Agrees to Purchase Cinven’s CPA Global
- Statoil Strikes Out at Norway’s Biggest Arctic Prospect
- TPG’s Bonderman to See $425 Million Windfall in Kite Pharma Sale
- Foot Locker Falls, Shoe Stocks May Move as Finish Line Cuts View
- Smallest Hedge Funds Will Be Quick to Drop Research Under MiFID
- Indonesia Wrests Ownership of Top Copper Mine From Freeport
- BMW Softens Electric i3 City Car’s Boxy Look to Counter Tesla
- EU’s Juncker Slams U.K.’s Brexit Position Papers as Talks Resume
- Brexit Branching Logjam Looms at BOE as EU Banks Consider Moves
- Ghana Banks on IMF Backing as Country Seeks Ambitious Growth
Asian equities traded mostly lower as markets were spooked by the latest North Korean provocation, after it fired a suspected
intermediate ballistic missile that flew over Japan and landed in the waters off Hokkaido. This sparked condemnation from its
neighbours with Japan branding it an unprecedented and grave threat, while South Korea conducted bomb dropping drills as a
show of force and stated that the US is considering deploying assets to the Korean peninsula. As such, the region's bourses were
pressured with ASX 200 (-1.0%), Nikkei 225 (-0.6%) and KOSPI (-0.8%) all negative, although Australian gold miners and South
Korean defence stocks outperformed with the former underpinned after the precious metal settled above USD 1300/oz for the first
time since November. Elsewhere, Chinese markets were mixed as the Hang Seng (-0.4%) conformed to the negativity, while
downside in Shanghai Comp. (+0.1%) was stemmed and later reversed due to strong earnings results. Finally, both Tnotes and
10yr JGBs began marginally higher as the risk averse tone spurred demand for safe-havens, although JGBs then pared some of its
gains following the enhanced liquidity auction for super-long JGBs in which the b/c declined from prior.
Top Asian News
- Axiata Is Said to Near $1 Billion Deal for Veon Pakistan Towers
- Freeport to Invest $17-20 Billion in Indonesia Through 2031
- Freeport Agrees to Divest Majority Stake in Indonesian Unit
- This Is the Only Asian Stock Market That’s Surging Today
- Hyundai Halts Production at Four China Plants on Parts Shortage
- China’s $1 Trillion Power Industry Overhaul Is Just Starting
European shares have hit their worst level in 6-months (Eurostoxx -1.2%) as rising tensions over North Korea weigh on
sentiment. All sectors are trading with losses, in particular media names as Prosiebensat plunges after the company stated that
they may consider a separate stock market listing for their content production and digital commerce businesses. Elsewhere, gold
miners are performing well this morning with, Rangold Resources and Fresinllo supported by the rise in gold prices, which has
soared to its highest level YTD. Flight to quality flow this morning has supported EGBs with bunds up over half a point. The German curve has
also bull flattened with 2s/10s flatter by 3.7bps and 10s/30s 1.4bps flatter. Peripheral bonds modestly weaker as spreads in the
Portuguese 10Y are wider by 8.1bps, while Italy is wider by 5.1bps against its German counterpart.
Top European News
- Unwind of ECB Set-Up Evident as Hike Pricing Pushes More Dovish
- ProSiebenSat.1 Drops as European TV Giants Hit by Soft Ad Market
- Denmark’s $450 Billion Covered-Bond Market Draws Record Demand
- U.K. House-Price Growth Slows in Line With Weakening Economy
- Carmignac Says Russian CPI-Linked Bonds Offer ‘Unusual’ Return
In FX, Reports that North Korea had fired an intermediate range missile over Japan prompted safe-haven flows during Asia-Pac trade, with USD/JPY dropping below 109.00 before stabilising, as markets await a clear response from the UN, Japan and US President Trump. Bids are said to be building around 108.50 but IFR note that Japanese institutional investors are not committed to buying the dips in the pair. There are not any huge option expiries today although there are strikes at 108.35-50 (430mln) and 109.00 (282mln). EUR/USD has risen to its highest level since Jan’15 after tripping stops above 1.20. Some also suggest that the rise in EUR has been due to Draghi neglecting to talk down the currency in his Jackson Hole speech on Friday. Additionally, cross related buying has been observed in EUR/GBP, which is currently testing 93.00 to the upside, further resistance lies at 93.65 (Oct’16 high). The CHF benefitted from safe haven demand following the missile test with USD/CHF dropping to 0.9500 before finding some support at the level. Cable has been relatively unperturbed by the North Korean missile launch and has been holding around the 55DMA of 1.2934. Comments from the latest round of Brexit negotiations have failed to provide the pair with a catalyst for a move in either direction as talks continue between UK Brexit Secretary Davis and EU Chief Negotiator Barnier.
In commodities, gold prices been further underpinned by safe-haven flows, after the precious metal had already settled above the
USD 1300/oz level for the 1st time since November. Elsewhere, copper was steady in which prices held around its best levels in
nearly 2 years. Crude prices off worst levels with WTI up 0.6% to approach USD 47.00 to the upside.
Looking at the day ahead, there is the Conference Board consumer confidence index for August and the June Case-Shiller house price indices.
US Event Calendar
- 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.1%, prior 0.1%; CS 20-City YoY NSA, est. 5.6%, prior 5.69%; 20-City NSA Index, prior 199
- 10am: Conf. Board Consumer Confidence, est. 120.7, prior 121.1; Present Situation, prior 147.8; Board Expectations, prior 103.3
* * *
DB's Jim Reid concludes the overnight wrap
The bank holiday in the UK yesterday and a damp squib of a Jackson Hole on Friday meant that markets were a bit quiet yesterday although news of another ballistic missile launch by North Korea, only this time over Japan, has seen activity pick up a bit overnight. Late last night reports emerged that North Korea had fired several ballistic missiles including one that flew over Japan(Northern island of Hokkaido) and eventually landed in the Pacific Ocean with no reports of damage. Japan’s PM Abe said “a missile passing over Japan is an unprecedented and serious threat” and has asked the UN Security Council to hold an emergency meeting. Abe also said that he has spoken to President Trump and agreed to increase the pressure on North Korea. Markets in Asia broadly sold-off following the news with the Nikkei (-0.61%), Kospi (-1.13%), ASX 200 (-0.87%) and the Hang Seng (-0.40%) all still in the red as we type. The Yen (+0.39%) and Gold (+0.48%) have firmed while US equity futures are down half a percent.
So once again geopolitics is front and centre for markets at the start of a new week. In terms of the rest of the week for the benefit of those in the UK out yesterday we’ve included the remainder of the week ahead at the end again. Payrolls and PCE inflation data highlight the back-end of the week but one event worth keeping an eye on today is the slated four-week T-Bill auction in the US given that the maturity lines up nicely with the debt ceiling deadline of September 29th that Treasury Secretary Steven Mnuchin called “critical”. It’ll be interesting to see what the demand is given some of the selling pressure in that part of the curve last week. For what it is worth a fairly packed day of Treasury auctions yesterday passed without any issues for the bond market.
Back to yesterday where the main price action came in the commodity complex and specifically in energy markets in reaction to the awful flooding in the state of Texas following Tropical Storm Harvey. The latest update is that around 30 inches of rain has already fallen but the suggestion is that we could see double that by the end of the week. In terms of the movers the standout was Gasoline which initially surged well over +6% at the open before paring that move as the day progressed but still finished up +2.74% and at the highest level in 4 months. It has extended that move this morning too to be up another +1.57%. The huge flooding hit the supply side of the equation hard with a number of key pipelines closed and over 2 million barrels of crude and condensate capacity in the state of Texas shutdown. Royal Dutch Shell and Exxon Mobil were among those to shutdown plants. On the other hand, WTI Oil fell -2.72% and the most in 7 weeks reflecting the huge drop off in crude oil demand. This morning, WTI has recovered some losses to be +0.52%.
It still appears to be far too early to assess the economic impact of the damage caused by Harvey but Bloomberg reported yesterday that costs could surpass $100bn. To put it in perspective Katrina – which was the most expensive hurricane to hit the US – cost nearly $120bn and Sandy cost about $75bn. Based on the experiences of prior hurricanes DB’s Brett Ryan has just published a note looking at the potential economic impacts from Harvey. He noted that Harvey could potentially drag on 2H real GDP growth by c.20bp mainly through disruption to exports, but the timing of these disruptions are difficult to be precise. Notably, some of the hit to economic growth will likely be offset by a boost to construction spending as rebuilding efforts get under way. Hence, the net impact will not likely affect the overall trajectory of the economy.
So while energy stocks closed down, gains for the more defensive sectors helped US equity markets broadly close flat. The S&P 500 ended +0.05% and the Dow -0.02%, with listed refiners based away from Texas up c.9%. Prior to this, markets in Europe finished a tad weaker albeit on thin volumes. The Stoxx 600 closed -0.48%. A late afternoon surge for the Euro didn’t help with the single currency adding to Friday’s gains by closing up +0.46% and at the highest (1.1979) since January 2015. Away from that both Treasuries (10y -1bp yesterday and -3bp this morning) and significantly Gold (+1.5%) – which passed $1300/oz for the first time since November – were well bid which seemed to reflect a slight risk off tone but also the lack of any hawkish surprises from Yellen on Friday.
Moving on. The first day of the next round of Brexit talks kicked off yesterday and it didn’t go smoothly. EU’s chief negotiator Michael Barnier said he is “concerned” about the progress of the talks and urged the UK to start “negotiating seriously”. Barnier welcomed the UK government’s position papers but noted “we need UK papers that are clear in order to have constructive negotiations”. His mandate effectively means the UK has to reach an agreement of its share of the EU’s 2014-20 budget, the Irish border and EU citizen rights before discussing a future relationship with the EU. One EU diplomat said many countries were ready to wait until the end of the year for the divorce deal, rather than the early autumn as the British had hoped.
Away from politics, yesterday we received the latest ECB CSPP data. As of August 25th, the ECB held €106.2bn which meant net purchases settled last week of €0.94bn. The average daily run rate was €188m which compares to a €348m average since the program started while the CSPP/PSPP ratio was 10.3% (versus previous weeks’ 9.6%, 11.4%, 12.8% and 6.1%). So another week of below average purchases but unsurprising in the context of the summer markets so not much to read into.
With regards to the other remaining data yesterday. In the US, the August Dallas Fed manufacturing activity index was in line with expectations at 17. Within the details, the hiring index slipped modestly from last month’s 19-month high, but the capex index rose to its highest level since January. Elsewhere, the July wholesale inventories were slightly higher than expected at 0.4% mom (vs 0.3% expected), while retail inventories fell 0.2% mom. Over in Europe, the Eurozone’s July M3 money supply was modestly lower than expected at 4.5% (vs. 4.9% expected as per Bloomberg Cons). In Italy, the August consumer confidence index increased 3.9pts to 110.8 (vs 106.9 expected), which is the highest reading for this year. Manufacturing confidence was in line at 108.1, while the economic sentiment indicator strengthened to 107 (vs. 105.6 previous), the highest reading since November 2007.
Looking at the day ahead, UK’s August Nationwide house price index (2.5% yoy expected) will be out in early morning, followed by Germany’s consumer confidence index (10.8 expected). Then France’s preliminary 2Q GDP stats (0.5% qoq and 1.8% yoy expected) and consumer spending for July are due. In the US, there is the Conference Board consumer confidence index for August and the June Case-Shiller house price indices.