The VIX tumbled by nearly 3 vols, down to 13.10 last, or over 18% lower and global stocks and S&P futures rebounded sharply on Monday as tensions over an imminent conflict with Pyongyang receded after U.S. officials played down the likelihood of a nuclear conflict with North Korea, recovering from fears of a U.S.-North Korea nuclear standoff drove them to the biggest weekly losses of 2017, while the dollar too rose off four-month lows it had hit against the yen.
As DB summarizes the latest events in the ongoing N.Korean crisis, this could be a pivotal week in the stand-off as last week Kim Jong-un did say that they would be ready to attack Guam by "mid-August" which if we are being literal is this week. However a lack of much news on the story over the weekend is surely a positive for now. Indeed the CIA’s director Pompeo tried to calm nerves by speaking to Fox news on Sunday, noting that “…I’ve seen no intelligence that would indicate that we’re in (the cusp of a nuclear war) today…” and would not be surprised if NK tested another missile. Further, national security adviser McMaster also said there’s no indication war will break out. Perhaps these comments were a response to Trump’s comments on Friday that “military solutions are…locked and loaded, should NK act unwisely…”.
European shares bounced after falling nearly 3% last week, with the STOXX 600 up 0.7% following on from a 0.9 percent jump in MSCI's index of Asia-Pacific shares outside Japan. The Stoxx Europe 600 Index headed for its first gain in four days, tracking increases across markets including South Korea. As the chart below shows, Still, Europe may be due for a pullback: the MSCI Europe Index hasn't had a 10% correction in more than a year.
Gains were led by bounces in Australia, Hong Kong and South Korea while the MSCI world index rose 0.2%. That said, as the following chart from Cantillon Consulting shows, the MSCI world index is finally testing the support of the channel established during the Trump reflation move: it either snaps or rebounds to new highs.
Japan failed to partake in the region's gains however, slipping 1 percent to three-month lows despite an impressive GDP print showing robust 1.1% Q2 growth in Japan (more below), driven by worries over the potential impact of the yen's recent surge against the dollar. Japanese investors also repatriated cash held overseas, keeping the USDJPY below 110. The dollar rose 0.5 percent to 109.70 after slipping to 108.720 on Friday, its weakest since April 20. Against a basket of currencies it firmed 0.2 percent, rising off last week's 10-day lows .
"As long as the geopolitics ease, we look for dollar/yen to gradually grind higher, back above the 110.00 level, along with gently rising U.S. yields," ING Bank analysts told clients.
"The risk aversion has stabilized and investors have gotten used to the North Korea situation a little bit - as long as it doesn't escalate further," said Daniel Lenz, a strategist at DZ Bank in Frankfurt.
That said, expectations of an all clear may be premature: North Korea's Liberation Day celebration on Tuesday to mark the end of Japanese rule could see tensions rise again, markets are relieved that the weekend had passed without more rhetoric. This may be reflect in the ongoing surge in bitcoin, which jumped for the second consecutive weekend, and hit a new all time high above $4,200 this morning.
In overnight data, Japan printed the strongest GDP in over two years, after the economy was said to have grown at a 4% annualized rate in Q2, a 6th consecutive quarter of growth. Meanwhile, economic data out of China disappointed across the board as Chinese retail sales and industrial production for July missed estimates.
South Korea’s won led a rebound in most Asian emerging-market currencies after several top U.S. national security officials said a nuclear war with North Korea wasn’t imminent. The MSCI Asia index ex Japan advanced for the first time in four days amid steady sovereign bonds. “With the geopolitical concerns surrounding North Korea appearing to stabilize a little, we could see the USD/Asia complex be fairly range-bound today with a slight downward bias,” said Julian Wee, a senior market strategist at National Australia Bank in Singapore. Japan’s yen weakened, after rallying the most since May last week on haven demand. Gold halted its advance amid the efforts by U.S. officials to soothe the escalating tensions on the Korean peninsula. Bloomberg Dollar Spot Index jumps 0.23%, first gain in three days
In China, the yuan gave up earlier gains with the offshore exchange rate falling most in six weeks as the dollar jumps and the People’s Bank of China sets a weaker-than-expected daily reference rate. The CNY dropped 0.05%, erasing an advance of as much as 0.16%, to 6.6700 per dollar, after the PBOC strengthened the yuan reference rate 0.06% to 6.6601, weaker than Mizuho Bank’s est. of 6.6573 and Nomura’s 6.6562.
In rates, 10-year TSY yields inched higher after falling on Friday to six-week lows following data showing that U.S. consumer prices rose just 0.1 percent last month, below economists' forecast of a 0.2% gain. Euro zone bond yields also rose, with investors interpreting the robust Japanese data as a sign that the global economy is indeed on the mend. While Japan is not expected to dismantle its stimulus program any time soon, analysts reckon that signs of global recovery gives euro zone and U.S. central banks a reason to start rolling back some of their asset purchases. The yield on Germany's 10-year government bond was up 4.5 bps to 0.43%, a move mirrored by most other euro zone debt.
Commodities trading was mixed overnight with safe-haven gold (-0.2%) pulling back from 9-week highs amid the improved risk sentiment. Demand for copper was subdued alongside weaker iron ore prices after Chinese Industrial Production data for July missed expectations, while WTI was quiet overnight with prices unchanged during Asia trade. Crude prices seeing a modest move lower, however prices are still up significantly from last week's gains with Brent remaining above $52. Much like fixed income, gold and silver prices are bearing the brunt of a more risk on environment. Libya's top oil field is said to drop on security threats.
Bulletin Headline Summary from RanSquawk
- Equities in the Green
- Brexit Whispers Once Again Begin
- S&P 500 futures up 0.6% to 2,454.30
- VIX down 2.94 to 13.10, -18.33%
- STOXX Europe 600 up 0.8% to 375.08
- MSCI ASIA down 0.1% to 158.25
- MSCIA Asia ex Japan up 0.8% to 520.33
- Nikkei down 1% to 19,537.10
- Topix down 1.1% to 1,599.06
- Hang Seng Index up 1.4% to 27,250.23
- Shanghai Composite up 0.9% to 3,237.36
- Sensex up 0.9% to 31,494.28
- Australia S&P/ASX 200 up 0.7% to 5,730.41
- Kospi up 0.6% to 2,334.22
- German 10Y yield rises 4bps to 0.42%
- Euro down 0.2% to 1.1803 per US$
- US 10Y yield rises 2bps to 2.21
- Italian 10Y yield falls 1bp to 2.02%
- Spanish 10Y yield fell 2bps to 1.44%
- Gold spot down 0.6% to $1,281.92
- U.S. Dollar Index up 0.3% to 93.32
Top Overnight News
- Two top U.S. national security officials sought to assuage fears of imminent nuclear war with North Korea following days of heightened rhetoric by President Donald Trump, as America’s top general prepares to meet with South Korea’s leader
- Patrick Drahi’s Altice NV is considering asking Canada Pension Plan Investment Board and BC Partners to help fund a potential bid to buy cable broadcaster Charter Communications Inc.
- JPMorgan Chase & Co. is proposing to charge as little as $10,000 a year for equity research, the lowest price to emerge so far, as the Wall Street giant seeks to grab market share when a European ban on free analysis for clients is imposed
- Venezuela will defend itself from the “madness” of Donald Trump, its defense minister said, a day after the U.S. president said he’s considering a military option in response to the escalating political and economic crisis in the oil-producing nation
- The pros who make their living forecasting the economy overwhelmingly expect President Donald Trump and his fellow Republicans to push through tax cuts in time for next year’s congressional elections
- Rovio Entertainment Oy is planning an initial public offering as early as next month that could value the maker of the Angry Birds mobile games and movie at about $2 billion
- Angry Birds Maker Is Said to Plan IPO at $2 Billion Value
- Toshiba Chip Sale Talks Are Said to Stall On Payment Timing
- Cathay ‘Begging With Golden Bowl’ to Win Back Chinese Fliers
- Alibaba and Tencent Looking Riskier And Placing Bigger Bets
- Stada Appeals to Hedge Funds to Push Through Bain, Cinven Bid
- MGM Resorts Bets on Wealthier Masses to Catch Up in Macau
- Survival of Brokers’ Morning Notes in Balance as MiFID Looms
- China Economy Loses Momentum as Factory Output, Investment Slow
- China July industrial output 6.4% vs 7.1% est; retail sales 10.4% vs 10.8% est; fixed-asset investment 8.3% vs 8.6% est
- Japan 2Q GDP 1.0% vs 0.6% est; y/y 4.0% vs 2.5% est; business spending 2.4% vs 1.2% est; private consumption 0.9% vs 0.5% est
- RBA’s Kent says interest rates unlikely to rise any time soon; RBA will be cautious when time to normalize
- New Zealand 2Q retail sales 2.0% vs 0.7% estimate
- Macri candidates leading key provinces in Argentina’s primaries
Asian equity markets traded mostly higher following the rebound of US stocks last Friday on Wall Street where the NASDAQ outperformed amid tech strength, while a miss on CPI dampened prospects of a December Fed hike. The improvement in risk sentiment was also supported as some geopolitical concerns abated which saw ASX 200 (+0.7%) and KOSPI (+0.6%) positive throughout the session, however Nikkei 225 (-0.8%) bucked the trend despite strong GDP numbers, as Friday's Asian session losses caught up with the index on its return from a long weekend. Elsewhere, Hang Seng (+1.2%) and Shanghai Comp (+0.4%) were positive following a firm liquidity operation by the PBoC, although gains in the mainland bourse were capped as Industrial Production and Retail Sales data added to the recent trend of disappointing Chinese data releases. Finally, 10yr JGBs traded flat as participants mulled over strong GDP numbers and losses in Japanese stocks, with demand also dampened from a lack of a Rinban announcement by the BoJ.
Japanese GDP (Q2 P) Q/Q 1.0% vs. Exp. 0.6% (Prey. 0.3%). Japanese GDP Annualized (Q2 P) 4.0% vs. Exp. 2.5% (Prey. 1.0%);
Chinese data reported overnight was weak across the board:
- Chinese Industrial Production (Jul) Y/Y 6.4% vs. Exp. 7.1% (Prey. 7.6%).
- Chinese Industrial Production YTD (Jul) Y/Y 6.8% vs. Exp. 6.9% (Prey. 6.9%).
- Chinese Retail Sales (Jul) Y/Y 10.4% vs. Exp. 10.8% (Prey. 11.0%).
- Chinese Retail Sales YTD (Jul) Y/Y 10.4% vs. Exp. 10.5% (Prey. 10.4%)
PBoC injected CNY 110bln in 7-day reverse repos and CNY 100bln in 14-day reverse repos. PBoC set CNY mid-point at 6.6601 (Prey. 6.6642) According to the China Commerce Ministry, China is to ban some imports from North Korea based on US resolution, the ban is to include imports of Iron ore, Coal, Lead and seafood (effective Tuesday August 15th)
Top Asian News
- Hong Kong Stock Exchange Trading Hall to Close in October: SCMP
- Alibaba, Tencent, Telstra Options Overprice Earnings-Day Moves
- Gold Giant Gains to Record as India’s Tax Shift Seen as Plus
- HSBC Lowers USD/SGD Forecast With MAS Seen Tightening in April
- Sunac Is Said to Consider Strategic Investor for Leshi: Caixin
A relief rally in Europe to begin the week with much of the gains stemming from financials, while RWE is making solid gains after strong earnings results. Elsewhere, Danone are among the best performers this morning following reports that Kraft and Coke are seen as possible buyers for the company. Demand for riskier assets amid the quiet newsflow over tensions on the Korean peninsula has subsequently hampered EGBs. German curve has been bear steepening this morning, while peripheral spreads are slightly tighter. UK Chancellor Hammond and Trade Minister Fox stated that the Brexit transition period will be limited and will be intended to avert a cliff edge. The ministers also added that the transition period cannot be an alternate path for staying in the EU. Markets have been unfazed by the speech, with the indecision and uncertainty continuing to be evident in sterling.
Top European News
- Hammond, Fox Say Transition Won’t Be Back Door to Staying in EU
- Pandora Shares Fall; Carnegie Says FY Guidance Is ‘Stretched’
- Draghi Gets Help From Euro Zone’s Northerners Wanting More Pay
- London’s Big Ben Bell to Fall Silent Next Week for Four Years
- Merkel’s Election Rivals Roll Out the Big Guns to Narrow Gap
- Allianz Looks to Buy Bunds After ECB Gives Tapering Steer
- Brace for Pound Turbulence as Economics and Politics Collide
In currencies, as newsflow covering the spat between North Korea and the US simmers down, the USD index has been trading at better levels against the Yen which has pressured major pairs. In turn, EUR tripped through 1.18 to hover near session lows. Poor data out of China damped AUD, as Chinese Industrial Production and Retail Sales missed across the board. As the data was digested, AUD/USD came off best levels, and trades around session lows, through 0.79 once again. A clear break through 0.7840 is needed to indicate any clear change of direction. Yen has seen some unwinding of the risk off positions taken throughout last week's trade, amid the growing geopolitical tensions. USD/JPY's June's low just through 109.00 saw some bids waiting, as the pair has come off best levels, with bulls likely to look to test 110.00. The pound has seen rangebound trade throughout the Asian session despite Brexit commentary emerging from the woodworks once again. Comments from UK Chancellor Hammond and Trade Minister Fox stated that the Brexit transition period will be limited and will be intended to avert a cliff edge. The ministers also added that the transition period cannot be an alternate path for staying in the EU. Markets have been unfazed by the speech, with the indecision and uncertainty continuing to be evident in sterling.
In commodities, trading was mixed overnight with safe-haven gold (-0.2%) mildly pulling back from 9-week highs amid an improvement in global risk sentiment. Conversely, demand for copper was subdued alongside weaker iron ore prices after Chinese Industrial Production data for July missed expectations, while WTI quiet overnight with prices unchanged during Asia trade. Crude prices seeing a modest move lower, however prices are still up significantly from last week's gains with Brent remaining above USD 52. Much like fixed income, gold and silver prices are bearing the brunt of a more risk on environment. Libya's top oil field is said to drop on security threats.
On today's calendar there is no major economic data and no Fed speakers
DB's Jim Reid concludes the overnight wrap
Hopefully you all had a good weekend? Mine involved picking up our new car and having to deal with epic meltdown tantrums. On Saturday we took Maisie to the swings where she couldn't stop smiling and laughing. She was so so happy. We then said it was time to go home and the response was to throw herself on the floor and roll about in pain like a diving footballer looking for a penalty, scream and shout, cry at the top of her voice and basically embarrass us. The same thing happened the following day at the first of her friends to have a second birthday party. She had a wonderful time and wouldn't stop giggling for two hours. Everybody remarked what a credit to us she was. Then when she was told we had to leave the humiliation of us as parents began. The only thing that calmed her down on both days was her new favourite TV show Peter Rabbit!! TV is becoming our saviour as bad parents......... until we turn it off and then the tantrums start again!!!!
Markets were obviously in semi tantrum mode over the course of the last seven days. This time last week we suggested how it was likely we would now be in for a summer lull for a couple of weeks and that it was set to be extremely quiet. We went on to say that if anything was guaranteed to ensure that something would blow up then it was that comment. So we were half right! To be fair in July the one thing that we raised that we thought could break the summer calm was that Mr Trump might look to distract from his legislative difficulties so far and up the ante against Korea. Tensions have been bubbling for a few weeks. It was impossible to predict the timing and a big risk to position for it but it was an observable risk. However it does take two to tango and Kim Jong-un has been highly provocative of late.
This could be a pivotal week in the stand-off as last week Kim Jong-un did say that they would be ready to attack Guam by "mid-August" which if we are being literal is this week. However a lack of much news on the story over the weekend is surely a positive for now. Indeed the CIA’s director Pompeo tried to calm nerves by speaking to Fox news on Sunday, noting that “…I’ve seen no intelligence that would indicate that we’re in (the cusp of a nuclear war) today…” and would not be surprised if NK tested another missile. Further, national security adviser McMaster also said there’s no indication war will break out. Perhaps these comments were a response to Trump’s comments on Friday that “military solutions are…locked and loaded, should NK act unwisely…”. On this whole episode I'm not sure what it is about Augusts. In my career, this month has often created volatility from nowhere. With people on holiday thin trading can certainly exacerbate market wobbles. Interestingly the WSJ over the weekend discussed how North Korean provocations haven't had much impact on markets in the past. They examined 80 international incidents involving their nuclear program since 1993 and their impact on financial markets. They suggested that there hasn't been much of a risk off in response to nuclear escalations. I suppose the reality is that its noise and bluster until it isn't. In the last 20 years it’s been mostly noise and then diplomacy. The worry that markets might have at the moment is that the Trump administration could be unpredictable relative to his predecessors. With his popularity low and legislative failures hurting then it’s possible to envisage a scenario where he reacts more aggressively than earlier presidents.
So far the sell-off has been relatively measured it’s just that in the context of very very calm markets recently it’s still been a bit of a shock. In our list of global assets we regularly review, Silver (+4.9%) and Gold (+2.4%) were the best performers last week. Gilts (+1.1% - the longest duration govt bond market), Bunds (0.6%) and Treasuries (+0.5%) were also towards the top of the leader board and showing pretty strong weekly numbers for fixed income. In terms of equities the highlights were the Nikkei (-1.1% but closed Friday), S&P 500 (-1.4%), FTSE (-2.1%), DAX (-2.3%), FTSE-MIB (-2.7%) and the IBEX (-3.5%). Note that European Banks (-4.0%) were one of the worse performers mostly responding to the drop in yields. Diving down more specifically on this for 10 year yields we saw Bunds -8bps, Gilts, -8bps, UST -6bps, OATs -6bps, Spain flat and Italy +4bps. In credit the sell-off was fairly measured with Crossover +11bps, iTraxx Europe +3bps, Sen Fins +2bps and US CDX IG +2bps on the week. Overall these type of moves wouldn't normally merit a specific mention but in the low vol world they have shaken things up a bit. We'd also note the VIX rose 55% last week from 10.0 to 15.51 but off the week's (and year's) highs of 16.04. Thursday actually saw the highest volume day ever for VIX options.
For equities so far the moves haven't been that large. In today's PDF we reproduce a table from DB's Binky Chadha looking at major geo-political events and US market sell-off. So spreading the net wider than just North Korea and also at actual events rather than aggressive rhetoric. He highlights 28 such events since the start of WWII and suggests that the average behaviour of the S&P 500 around geopolitical events is of a sharp short-lived selloff with 1) a median sell off of -5.7%, 2) 3 weeks to find a bottom, 3) Another 3 weeks to recover to prior levels and 4) Significantly higher markets 3 months (+6.5%) and 12 months (+13%) on.
This morning, Asian markets were broadly higher as new escalations in the conflict is good news for now. Japan’s preliminary 2Q GDP beat expectations at 1% qoq (vs. 0.6% expected) and 4% yoy (vs. 2.5% yoy), but the Nikkei fell 0.8%, partly reflecting a catch up effect as last Friday was a holiday. Also, our Japanese economist believe the 2Q trends appears too good to be sustained, partly as major leading indicators of investment appear to have already peaked. Elsewhere, Chinese data was softer than expectations, with the July IP at 6.4% yoy (vs. 7.1%, 7.6% previous) and retail sales at 10.4% yoy (vs. 10.8%). Chinese markets have dipped a little after the news, but have continued to strengthen afterwards, with the Hang Seng up 1.2% and Chinese bourses up 0.4% to 1.7% as we type. The Kospi is up 0.7% and the Won up 0.4%.
Onto Friday's US July inflation numbers, which missed for the fifth consecutive month. Headline inflation was lower than expected at 0.1 % mom (vs. 0.2%) and 1.7% yoy (vs. 1.8%), but core inflation was in line at 1.7% yoy. DB’s Luzzetti argued there were some outliers and saw some tentative signs of an improving underlying trend (medical services inflation). Even so, the team acknowledge that it is difficult to dismiss the string of recent soft inflation prints. Looking ahead, core CPI inflation is still expected to remain near recent levels in yoy terms through 2017, but on a mom basis, DB expects a rebound through year end, which if it occurs would support a Dec 17 rate hike. However that hike must be more in doubt at the moment.
Elsewhere, the Dallas Fed’s Kaplan said that whilst he was a strong advocate of the two recent rate hikes, “I at this stage want to see continued evidence - or more evidence - that we’re making progress on reaching our inflation objective, …I’m willing to be patient”. According to Bloomberg’s implied probability function, the chance of a rate hike in Dec 17 has fallen from ~38% to ~26% post the CPI data and Fed speeches.
Elsewhere, in an attempt to get Brexit talks back on track. The UK government plans to issue three discussion papers ahead of the next round of talks on 28th August. The papers could set out proposals for Northern Ireland and borders with Ireland, continuity on the availability of goods and confidentially & access to official documents after Brexit.
Before we take a look at today’s calendar, we wrap up with other data releases from Friday. In the US, there was the aforementioned CPI stats. Over in Europe, the final July inflation readings for Germany and France was released, both had no change relative to their flash readings. For Germany, it was 0.4% mom and 1.5% yoy, and for France, it was -0.4% mom and 0.8% yoy.
To the week ahead now. Today starts with the Eurozone’s industrial production (IP) stats for June. Onto Tuesday, Japan’s final reading for June IP and capacity utilisation stats as well as German’s preliminary 2Q GDP stats will be due early in the morning. Then UK’s July CPI, PPI and retail price index are due. Over in the US, there will be quite a lot of data, including: July retail sales, import / export price index for July, empire manufacturing stats, NAHB housing market index and US foreign net transactions for June. Turning to Wednesday, the Eurozone and Italy’s preliminary 2Q GDP stats are due. Then for UK, we have the July jobless claims and claimant count rate and the June ILO unemployment data. Across the pond, we get the FOMC meeting minutes along with the July housing starts and MBA mortgage applications stats. For Thursday, Japan’s July trade balance, exports/ imports data along with France’s ILO unemployment rate will be out early in the morning. Then the Eurozone’s July CPI and UK’s July retail sales are due. In the US, quite a lot of data again, including: July IP, conference board US leading index, the Philadelphia Fed business outlook survey, initial jobless claims and continuing claims stats. Finally on Friday, Germany’s PPI will be due early in the morning. Follow by the Eurozone’s June current account stats and construction output data. In the US, various University of Michigan sentiment index are also due.