World Stocks Rebound, Dollar Rises As Korea Nuclear War Fears Recede

S&P futures are higher in early Wednesday trading, alongside Asian stocks and European bourses, both solidly in the green as the EURUSD drifts below the 1.20 "redline" while the dollar rebounds off a two and a half year low following the US "measured" response to North Korea’s missile test, which soothed jittery investors who now turn their focus to US economic data. Equity indexes in Japan, Hong Kong and South Korea also rose while 10Y US Treasuries are steady before the release of ADP employment and GDP data, both of which are expected to show an increase. The VIX is down fractionally to 11.60.

European stocks rose higher, tracking counterparts in Asia and the United States and reversing losses from the day before when investors were spooked by Pyongyang’s firing of a ballistic missile over Japan. Fears that this could trigger an aggressive response receded on Wednesday after the United Nations - in a statement drafted by the United States - condemned North Korea’s latest missile launch but held back any threat of new sanctions.

Trump, who previously vowed not to let North Korea develop nuclear missiles that can hit the mainland United States, said the world had received North Korea’s latest message “loud and clear”.

“Instead of the (U.S.) President responding to the escalation via Twitter, as has happened on many recent occasions, the White House issued an official statement to condemn the action,” said IronFX analyst Charalambos Pissouros. “This may have been interpreted by investors as a sign that the US will approach the situation in a more measured and diplomatic manner, as opposed to raining down ’fire and fury’.” North Korean media reports on the launch also lacked their usual claims of technical advances, indicating the test may not have succeeded as planned.

Boosted by this optimism from Trump's response, European markets rebounded after yesterday's U.S.-led unwind of the North Korea related risk-off move. DXY holds at overnight strongest levels; AUD marginally outperforms after solid construction data; USD/JPY briefly traded above 110.00 through the European open which also provides a lift to U.S. equity futures.

In Europe, the pan-European STOXX 600 gained 0.5%, recovering nearly all the ground lost in the previous session and banking stocks - which had led the risk-averse move lower on Tuesday - were up nearly 1 percent, while the utilities sector lags after France warns on eventual closure of nuclear plants. European strength emerged after the stronger dollar pushed the EURUSD off the 1.20 ledg, trading below 1.950 last. The U.K.’s FTSE 100 Index increased 0.2%. Germany’s DAX Index rose 0.4 percent, the largest advance in more than a week.

European upside followed gains in Asia, where MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.6% while Japan's Nikkei rose 0.7%. The Hang Seng Index rose 1.2%, closing above 28,000 for the first time in two years as concern over North Korea tensions waned and China Shenhua Energy led power producers higher, while banks rose ahead of earnings results.  The Shanghai Composite Index fluctuated before edging lower. The MSCI Asia Pacific Index rose 0.2 percent.

The Chinese currency extended a surge that made it Asia’s best performer this month, rising to its highest level since June 2016 amid a weak dollar, following 11 consecutive days of increases in the offshore CNH. The CNY strengthens 0.05% to 6.5923 per dollar as of late afternoon trading in Shanghai in fourth day of gains; the currency has climbed 2.1% this month. On Wednesday, the PBOC strengthened the yuan reference rate for the third day, raising it by 0.29% to 6.6102, meanwhile the Bloomberg replica of CFETS index, which tracks the yuan against 24 currencies, climbed 0.37% to 94.0325, highest since Aug. 11

Meanwhile, Bund futures edged higher as German regional CPIs indicated a national reading broadly in-line with consensus, German and U.K. curves slightly steeper.  Euro zone government bond yields, which fell to fresh lows on Tuesday, edged up on Wednesday as forecast-beating inflation in Spain was expected to be followed by similar data in Germany, defying the euro’s recent strength. The yield on 10-year Treasuries climbed less than one basis point to 2.13%. Germany’s 10-year Bunds increased one basis point to 0.35%, while Britain’s 10-year yield gained two basis points to 1.019%, the largest advance in more than a week.

In commodities, gasoline hit a two-year high, rallying another 2.8%, after Hurricane Harvey shut down nearly a fifth of U.S refining capacity, and more closures are expected.

However, the rising crude inventories as a result of refinery shutdowns, weighed on oil prices. U.S. crude futures fell 0.6 percent to $46.17 a barrel, after touching a five-week low on Tuesday. Brent slipped 0.6 percent to $51.67. Spot gold edged marginally lower to $1,309.39 an ounce on Wednesday. On Tuesday, the precious metal jumped to its highest since Trump was elected U.S. president.

Economic data include second print on GDP growth, weekly MBA mortgage applications and August ADP employment. Analog Devices Inc. and Workday Inc. are among companies reporting earnings.

Bulletin Healine Summary from RanSquawk

  • European equities enter the North American crossover higher as markets look through some of the recent NKrelated tensions
  • USD is trading at better levels against its major counterparts to pare yesterday’s declines. USD/JPY briefly back above 110.0, although under now
  • Looking ahead, highlights include national German CPI, US ADP, PCE, DoEs and Fed’s Powell

Market Snapshot

  • S&P 500 futures up 0.1% to 2,450.50
  • VIX -0.10 or -0.85%, to 11.60
  • STOXX Europe 600 up 0.5% to 370.15
  • MSCI Asia up 0.2% to 160.47
  • MSCI Asia ex Japan up 0.6% to 531.87
  • Nikkei up 0.7% to 19,506.54
  • Topix up 0.6% to 1,607.65
  • Hang Seng Index up 1.2% to 28,094.61
  • Shanghai Composite down 0.05% to 3,363.63
  • Sensex up 0.9% to 31,681.89
  • Australia S&P/ASX 200 up 0.01% to 5,669.72
  • Kospi up 0.3% to 2,372.29
  • German 10Y yield rose 1.3 bps to 0.355%
  • Euro down 0.2% to $1.1944
  • Brent Futures down 0.9% to $51.56/bbl
  • US 10Y yield rose 2bp to 2.13%
  • Italian 10Y yield fell 1.6 bps to 1.774%
  • Spanish 10Y yield rose 1.7 bps to 1.579%
  • Brent Futures down 1.1% to $51.41/bbl
  • Gold spot up 0.2% to $1,311.67
  • U.S. Dollar Index up 0.3% to 92.51

Top Overnight News

  • Euro-area economic confidence rose to the highest level in a decade as European Central Bank policy makers prepare for a discussion next week about whether and how to pare back stimulus
  • With floodwaters still rising and damage estimates piling up, analysts expect just a modest dent in the U.S. economy from Hurricane Harvey this quarter, with reconstruction efforts likely to be substantial enough to boost growth later this year
  • North Korea’s Kim says IRBM firing is ’prelude’ to containing Guam; Yonhap says possibility that North Korea launches missile into the Pacific Ocean to show off ability to strike U.S. mainland cannot be excluded
  • On Tuesday morning, disaster analyst Chuck Watson had pegged $42 billion as a reasonable estimate for the cost of destruction Tropical Storm Harvey would leave in its wake. By the end of the day, he’d added another $10 billion
  • With floodwaters still rising and damage estimates piling up, analysts expect just a modest dent in the U.S. economy from Hurricane Harvey this quarter, with reconstruction efforts likely to be substantial enough to boost growth later this year
  • Fed policy makers hoping for a pick-up in inflation in the coming months may end up being frustrated by a quirk in the price data
  • Resilient economic growth and a government campaign against excessive leverage are helping China’s largest banks, curbing their bad loans and underpinning their net interest margins
  • Euro-area economic confidence rose to the highest level in a decade as European Central Bank policy makers prepare for a discussion next week about whether and how to pare back stimulus
  • Banks have a challenge when Congress returns from summer recess next week. His name is John Neely Kennedy. The freshman Republican senator from Louisiana is one of a handful of lawmakers who could squash the finance industry’s dream of tweaking a key Consumer Financial Protection Bureau regulation
  • Toyota Tsusho Corp., the automaker’s trading arm, will invest an undisclosed amount in Grab, Southeast Asia’s leading ride-hailing operator
  • German Aug. Regional CPIs y/y (National est. 1.8%): Saxony 1.9%; Brandenburg 1.8%; Hesse 1.8%; Bavaria 1.8%; NRW 1.9%
  • U.K. PM May: no Brexit deal is still better than a bad deal; wants a smooth Brexit and implementation period
  • ‘Apocalyptic’ Flooding Has Harvey Damages Rising by the Hour
  • Kim Says Missile Over Japan Was ‘Prelude’ to Containing Guam
  • Latest North Korea Missile Launch Spurred White House Game Plan
  • United Technologies Nears $20 Billion Rockwell Deal, WSJ Says
  • Uber Draws Justice Department Inquiry Over Foreign Payments
  • Uber CEO Pick Embraces Job as ‘Opportunity of a Lifetime’
  • RBNZ’s Wheeler says lower NZD needed; scope for easing if growth slows
  • Amazon, Microsoft to Enable Alexa, Cortana to Communicate: NYT
  • China Regulator Is Said to Review Antitrust Complaint on Apple
  • Tillerson to Meet With Heads of Delta, United, American: State
  • Goldman to Detail Bond-Trading Unit Strategy in Sept.: Reuters
  • Equipment Rentals Are Unlikely to Rise From Harvey: Wells Fargo

Asia equities traded mostly positive as the region followed suit from the improvement in sentiment seen in US, where markets ignored the geopolitical concerns and bought the dip. This saw a rebound in Asia stocks with Nikkei 225 (+0.7%) underpinned as the USD/JPY-risk relationship took full effect and with better than expected Retail Sales adding to the optimism. ASX 200 (flat) lagged and was negative for most of the day as continued weakness in financials and hefty losses in telecoms dragged, with Telstra the worst performer as it traded ex-dividend and after the NBN rejected Co.’s monetisation plan. Elsewhere, Shanghai Comp. (flat) and Hang Seng (+1.2%) benefited from the increased risk appetite and after a firmer liquidity operation by the PBoC, although gains in the mainland were later pared amid weakness in Chinese commodity prices. Finally, 10yr JGBs were lower amid flows into riskier assets, while a lukewarm BoJ Rinban announcement also failed to spur demand.

Top Asian News

  • China’s $2 Trillion of Shadow Lending Throws Focus on Rust Belt
  • Japan Stocks to Watch: Fujifilm, Mitsubishi Motors, Nitto Denko
  • Foreign Banks Chase Panda Bond Deals as Chinese Market Grows
  • Rio Tinto Weighs ‘Stay-or-Go’ Call on Indonesia’s Grasberg
  • Yuan Strength Helps Chinese Airlines Soar Amid Mixed Earnings
  • Japan Stocks Blasé After North Korean Missile Launches This Year
  • M&S in Talks to Sell Hong Kong, Macau Units to Al- Futtaim
  • Hong Kong’s H-Share Index Trailing in Hang Seng’s Wake
  • India Dodgy Contracts Record Risks Turning Away Investors

Modest relief bounce in European equities (Eurostoxx 50 +0.4%) this morning following yesterday’s fall to 6-month lows with all sectors (with the exception of utilities) trading in positive territory. Jitters regarding North Korea are somewhat dissipating slightly. EGB yields ticking higher this morning amid the reversal in price action across equity markets, while slight underperformance has been observed in the belly of the curve with the 10Y yield tracking higher by 2.1bps. Peripheral spreads vs Germany are slightly narrower today with the German/Portuguese spread tighter by 0.3bps. Supply from Italy was relatively well absorbed by the market.

Top European News

  • U.K. Asked EU for More Time to Talk Brexit as Reality Sinks in
  • Cryptocurrencies Are New Barbarians at the Gate of Central Banks
  • Russia Readies Emergency Loans to Contain Bank Otkritie Crisis
  • U.K. Consumer Borrowing Cools Slightly as Business Loans Jump
  • Ocado Rises as Citi Sees Amazon-Whole Foods Piquing Interest
  • Siemens Extends Push Into Driverless Cars With TASS Acquisition
  • NordLB First Half Net Interest Income EU731 Mln
  • Fortum May Be Eyeing PVO or Uniper Acquisition, Nordea Says

In currencies, USD trading at better levels against its major counterparts to pare yesterday’s declines. USD/JPY back above 110.00 amid the slight improvement in risk sentiment, next resistance in the pair resides around 110.35-40. EUR is lower this morning, albeit mildly so, despite the first of the regional German CPI data (Saxony) showing an increase in Y/Y inflation, which is also above analyst estimates for the national figure. As such, a continuation of this trend among other regions could see EUR better supported throughout the session. Slight profit taking has been seen in EUR after yesterday hitting a new 2 and a half year high at 1.2070. AUD: Main mover overnight had been the AUD, which approached 0.80 having reached a high of 0.7995. This followed some relatively strong data in the form of building and construction data, while gains against the JPY and NZD further underpinned AUD. AUD/NZD briefly broke above 1.10 before running into resistance at the YTD high of 1.1020.

In commodities, crude oil prices continuing to feel the pressure from Hurricane Harvey with a 5th of US refining capacity now shut and as such, likely to reduce demand from refineries. Gasoline however, has hit two year highs given the risk of fuel shortages. Of note, last night’s API report showed a drawdown of 5.7mln in US crude. Elsewhere, gold has faced some selling pressure amid the resurgence of the USD and mild reprieve in NK-related tensions. Chinese iron ore prices were also seen lower overnight in a pullback from some of the recent sharp gains. Libya's NOC says 360kbpd of crude production shutdown by pipeline blockades that have closed 3 fields. US API weekly crude stocks (21 Aug, w/e) -5780K (Prev. -3595K). Valero Port Arthur refinery is shutting large crude unit and gasoline unit, due to Harvey. Motiva states that although weather conditions continue to deteriorate, Port Arthur refinery remains stable at 40% of capacity.

Looking at the day ahead, US’s ADP employment change for August (185k expected) will be worth watching in the context of Friday’s payrolls while the second readings for 2Q GDP (2.7% expected) and core PCE are due. Away from the data, the Fed’s Powell will speak today.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -0.5%
  • 8:15am: ADP Employment Change, est. 185,000, prior 178,000
  • 8:30am: GDP Annualized QoQ, est. 2.7%, prior 2.6%
  • 8:30am: Personal Consumption, est. 3.0%, prior 2.8%
  • 8:30am: GDP Price Index, est. 1.0%, prior 1.0%
  • 8:30am: Core PCE QoQ, est. 0.9%, prior 0.9%

DB's Jim Reid concludes the overnight wrap

With geopolitics back in the spotlight and markets somewhat treading on eggshells again the most eye-catching move for us yesterday was seeing Treasury yields dart back below their pre-Sintra levels. Indeed at one stage 10y Treasuries touched as low as 2.084% yesterday morning before ending last night a bit higher at 2.129%. On an intraday basis the low for the year had been 2.101% back in the middle of June before the coordinated hawkish message in Portugal later that month. 10y Bunds (-3.4bps to 0.338%) are now also less than 10bps away from their pre-Sintra levels after topping out at 0.597% just over a month ago. Benchmark OATs are also within 6bps of their YTD lows while bond markets in the Netherlands and the UK are also near their lows.

A decent run for DM bond markets then which is noticeable when you consider that global growth signals (recent PMIs) have been robust, commodity prices ex oil are either at or around YTD highs for the most part and the expectation is still that the ECB is likely to signal a tapering this autumn and the Fed might still hike again in December (albeit with market pricing down to just 30% based on Bloomberg’s calculator). All these factors have been put to one side however as politics has taken center stage through the northern hemisphere summer. Concerns firstly about President Trump’s political agenda and more recently the debt ceiling and now the latest North Korea developments have certainly all played a role in the recent moves. Regarding the latter, the response by President Trump yesterday to North Korea firing a missile over Japan was to say that “all options are on the table” for a response while North Korea’s Kim Jong Un has said overnight that the missile test was a “meaningful prelude to containing Guam” according to North Korean state media.

The response from markets meanwhile has actually been more of a tale of two halves. The initial reaction was to see safe havens rally and European equities selloff. Indeed the Stoxx 600 ended -1.04% although in fairness that wasn’t helped by another strong session for the Euro which smashed through 1.200 versus the Dollar before softening a bit into the evening to close at 1.1972 (-0.06%). After the S&P 500 initially opened -0.66% the tone swiftly reversed with the view that the response from world leaders was fairly measured and further escalation was unlikely. The S&P closed +0.08% by the end of play with losses for banks and Best Buy (-12% post results) offset by gains from the industrials and tech sectors. The VIX, which topped out at 14.34 intraday and the highest in over a week, finished up ‘just’ +3.36% at 11.70 and well below  the two peaks of earlier this month (15.55 and 15.51). Other safe havens yesterday pared gains with Gold down -0.07% after being up +1.20% and the Swiss Franc +0.05% after being up +1.32%.

This morning in Asia markets have broadly followed the US lead and are trading higher, with the Kospi (+0.08%), Nikkei (+0.58%) and Hang Seng (+0.75%) all firmer, while only the ASX 200 (-0.20%) is struggling for traction. The Korean Won is also +0.40% this morning while US equity futures are pointing towards a positive start. The other notable mover is US gasoline prices which having rallied over +4% yesterday are up another +3.21% this morning in the wake of Tropical Storm Harvey.

Moving on. One thing worth highlighting this morning is a Politico story which ran last night suggesting that Trump will today launch a “major push for a sweeping tax overhaul” at a speech in Missouri. The article suggests that the speech is to be focused on the US corporate system and making it more competitive on a global scale, as well as wiping out deductions that benefit higher-income tax payers. So we’ll see what that has in store.

Jumping to the latest on Brexit now where there are only two more rounds of talks penciled in before an EU summit and things do not appear to be going smoothly based on the reports that have emerged. The UK has reportedly asked for more negotiating time with the EU to pick up the pace, but the EU first wants to settle the terms of the split, particularly the financial settlement and seems happy to shift to more talks in December. To put it into context, European Commission President Juncker said “I’ve read all (UK government’s) position papers and none of them is satisfactory”. A spokesman for UK PM Theresa May said “we believe we’re in a good position and we would like to move on to discuss our future relationship”.

Staying in Europe, German Chancellor Angela Merkel spoke at her annual summer press conference and covered a range of topics. On the rising Euro, Merkel highlighted that it is almost certain to have an impact on exports, but the trade surplus is the result of solid demand for German products and “does not view the trade surplus as so dramatic”. Elsewhere, Merkel noted that she “doesn’t have anything against the concept of an EU finance minister”, but “you just have to work out what he/she could do and we’re not at that point yet in our talks with France”.

Across the pond the Treasury’s four week $25bn bill sale went smoothly yesterday at a yield of 0.960% and achieved the highest bid-to-cover ratio since the 7th March auction. The notes mature just before the US potentially facing a funding shortfall if the debt ceiling was not raised.

Wrapping up yesterday’s macro data in the US which was largely in-line to slightly firmer than expected. The August Conference Board consumer confidence index was up 2.9pts to 122.9 (vs 120.7), which is the highest reading since December 2000 (excluding March this year) and could have been stronger if factoring in the small downward revision to the prior reading. Elsewhere, the June Case-Shiller house price index was broadly in line at 0.11% mom (vs 0.10% expected) and 5.65% yoy (vs 5.60% expected).

Over inFrance, 2Q GDP was in line at 0.5% qoq, but revisions nudged the annual growth rate down slightly to 1.7% yoy (vs 1.8%). Consumer spending for July was in line at 0.7% mom, lifting the annual growth rate to 2.1% yoy (vs 1.8%), which is the highest reading for this year. InGermany, the consumer confidence index was slightly ahead of expectations at 10.9 (vs 10.8), which marks a fresh 16-year high. In the UK, the August Nationwide house price index was slightly lower than expected at -0.1% mom (vs 0% expected) and 2.1% yoy (vs 2.5%).

Before we look at the day ahead, a quick mention that on credit derivatives, Michal in our team published a report “iTraxx Main: Buy the 3s5s10s Fly” yesterday. He fleshes out his latest views on CDS index curves and provides a detailed analysis of the trade, including recent regulatory developments that should support its performance. You should find the note in your inbox or email for a copy if not.

Looking at the day ahead,Germany’s preliminary inflation readings for August (0.1% mom and 1.8% yoy expected) and Italy’s July PPI data are due. In the UK, the July mortgage approvals and data on money supply as well as net credit lending are also due. Elsewhere, the Eurozone’s August confidence indicators for business, consumer and the economy are also due. Across the pond, US’s ADP employment change for August (185k expected) will be worth watching in the context of Friday’s payrolls while the second readings for 2Q GDP (2.7% expected) and core PCE are due. Away from the data, the Fed’s Powell will speak today.