US futures are set for a sharply lower open (at least in recent market terms) following a steep decline in European stocks and a selloff in Asian shares, following yesterday's sharp escalation in the war of words between the U.S. and North Korea. In a broad risk-off move U.S. Treasuries rose, the VIX surged above 12 overnight, while German bund futures climbed to the highest level in six weeks. The Swiss franc gained 1.2 percent to 1.1320 per euro its biggest daily advance since February 2015, while the yen surged as much as 0.8% against per euro, its strongest level in three weeks while gold rose. "Trump's comments about North Korea have created nervousness and the fear is if the President really means what he said: "fire and fury"," said Naeem Aslam, chief market analyst at Think Markets in London. "The typical text book trade is that investors rush for safe havens."
Gold was headed for it’s largest gain this month while the yen and Swiss franc were the biggest advancers among G-10 currencies after President Donald Trump ratcheted up his rhetoric against North Korea. Treasuries and most European government bonds climbed amid the shift to safer assets, while almost every sector of the Stoxx Europe 600 Index fell and emerging markets equities were poised for the biggest drop since June 15. The rand extended losses after South Africa’s president survived a no-confidence vote.
Earlier on Tuesday, volatility from the U.S. to Japan rose after Trump said in response to a Washington Post report on North Korea’s nuclear capabilities that further threats from the country would be met with “fire and fury.” North Korea said it’s examining an operational plan for firing a ballistic missile toward Guam. The VIX jumped above the 200-DMA as equity markets continuously push lower. The financial sector lagged, while defensive healthcare sector outperforms; gold and crude were supported in tandem...
The heightened geopolitical tensions between the US and North Korea dampened global risk sentiment, which snapped the DJIA's streak of record closes and saw nearly all Asia-Pac bourses in negative territory. This was after US President Trump warned North Korea the US would respond to any threats with an unprecedented level of "fire and fury", which spurred a response from North Korea that it was considering striking Guam with mid-to long-range missiles.
“Trump in his reactions is something new for all of us,” Geraldine Sundstrom, portfolio manager at Pimco Europe, said in an interview on Bloomberg TV. “Given the nature of the threats, given the players are new, it makes the situation a little bit unusual,” said Sundstrom, who recommended safe haven trades and minimizing risks through duration. As a result, global assets have slumped in a "classic, risk-off reaction" as Bloomberg puts it.
The MSCI EM Asia Index of shares slid the most in a month. “We’re seeing a bit of risk aversion due to concerns over North Korea,” said Dushyant Padmanabhan, a currency strategist at Nomura in Singapore. “Besides the geopolitics, the market will also be focused on the Friday’s U.S. CPI print and what clues that might give us on the path for inflation.”
The Nikkei 225 (-1.3%) underperformed as exporters suffered from the flows into JPY. The Nikkei Stock Average Volatility Index soared as much as 38%, most since August 2015, with the VNKY Index closing +24% at 16.00. The Korean KOSPI (-1.1%) was also, so to say, "weighed down" by the increased threat of nuclear war. In retrospect, that the South Korean market dipped just over 1% on the prospect of a mushroom cloud, is rather impressive.
Hang Seng (-0.4%) and Shanghai Comp (-0.2%) were subdued following a miss on Chinese CPI and PPI data, while ASX 200 (+0.4%) bucked the trend amid gains in the metals-related stocks and with the largest-weighted financials sector buoyed after big-4 bank CBA reported an 8th consecutive year of record profits. Demand for 10yr JGBs was spurred by a flight to quality and with the BoJ in the market for JPY 770b1n of JGBs. The curve also slightly flattened amid outperformance in the long-end.
Elsewhere, the Stoxx Europe 600 Index declined 0.6 percent as of 9:54 a.m. in London, the largest drop in more than a week on a closing basis. The U.K.’s FTSE 100 Index declined 0.6 percent, the first retreat in a week. Germany’s DAX Index sank 1.2 percent in the biggest tumble in almost three weeks. Futures on the S&P 500 Index sank 0.4 percent, the largest decrease in almost five weeks. The MSCI Emerging Market Index sank 0.9 percent, the biggest dip in almost eight weeks.
"Heightened geopolitical risks overnight have seen the markets flip from risk-on to risk-off and we have to wait and see how long this move runs before adding some positions," said Viraj Patel, an FX strategist at ING in London.
In overnight FX trading, risk aversion dominated trading as the Swiss franc and the yen led gains among Group-of-10 currencies, while the dollar index steadied as EM currencies halted a three-day rally. The yen appreciated as much as 0.8 percent to 128.61 per euro, its strongest level in three weeks. During previous occasions of political turmoil between the U.S. and North Korea, the Japanese currency over performed, yet the Swiss franc’s sharp decline in the past two weeks made for stretched positioning versus the euro, resulting in a bigger gain. The Australian dollar and New Zealand dollar both weakened. South Korea’s won fell to a three-week low amid heightened geopolitical tensions over North Korea...
CNH and CNY both rally through 6.70/USD, highest since October 2016 after another stronger PBOC fixing. Core fixed income gains sharply, curves bull flatten with heavy volume noted in USTs. VIX jumps above 200-DMA as equity markets continuously push lower. Financial sector lags, while defensive healthcare sector outperforms; gold and crude supported in tandem.
Some remain skeptically optimistic: at the moment the tensions increasing around North Korea’s nuclear weapons program does remain an “exchange of rhetoric,” and under normal expectations it’s difficult to think that any “real action” will be taken from here, says Takuya Yamada, a senior money manager in Tokyo. •If something actually happens, it won’t be surprising to see the market fall 5%, 10% in no time at all. However investors are aware of the fact that if North Korea takes action it will mean self- destruction, so their premise is that this is merely “trash talking.”
"We've had some competing forces play out over the past 12 hours - the U.S. dollar was stronger off economic data, but that was quickly reversed with President Trump's comments about North Korea earlier today (Wednesday)," said ANZ analyst Daniel Hynes.
In rates, the yield on 10-year Treasuries decreased two basis points to 2.24 percent. Germany’s 10-year yield declined four basis points to 0.44 percent, the lowest in six weeks. Britain’s 10-year yield fell four basis points to 1.117 percent, the lowest in six weeks. France’s 10-year yield dipped three basis points to 0.73 percent.
In commodities, gold gained 0.6 percent to $1,267.99 an ounce, heading for the biggest one-day increase since July 28. West Texas Intermediate crude climbed 0.4 percent to $49.36 a barrel.
Looking at the day ahead, there is the preliminary 2Q nonfarm productivity (0.7% expected) and unit labour costs (1% expected) data, final June wholesale inventories (0.6% expected) as well as the MBA mortgage applications. In Asia, Japan’s PPI for July will also be out on early Thursday morning. Notable US companies reporting today include Twenty First century Fox.
# Market Snapshot;
- S&P 500 futures down 0.4% to 2,463
- STOXX Europe 600 down 0.8% to 379.60
- Nikkei down 1.3% to 19,738.71
- Topix down 1.1% to 1,617.90
- Hang Seng Index down 0.4% to 27,757.09
- Shanghai Composite down 0.2% to 3,275.57
- Euro down 0.2% to 1.1730 per US$
- US 10Y yield fell 2 bps to 2.24%
- Brent Futures up 0.02% to $52.15/bbl
- Gold spot up 0.6% to $1,268.77
- U.S. Dollar Index down 0.03% to 93.62
# Top Overnight News;
- President Donald Trump’s threat to hit North Korea with “fire and fury” jolted markets from New York to Seoul even as U.S. lawmakers questioned the president’s willingness to back up the heated rhetoric
- N. Korea can strike before any U.S. pre-emptive attack; considering
firing ballistic missiles “at areas around Guam” where U.S. strategic
bombers are stationed: KCNA
- Trump’s presidential campaign, his son Donald Trump Jr. and former campaign manager Paul Manafort have started turning over documents to the Senate Judiciary Committee as part of the panel’s expanded investigation of Russian election- meddling
- South African President Jacob Zuma narrowly overcame a bid by opposition parties to topple him through a no-confidence motion in parliament. The real loser may be his own party, the African National Congress
- Morgan Stanley beat Goldman Sachs Group Inc. to become the most profitable foreign securities firm in Japan last fiscal year after it boosted structured-product sales and managed the two biggest initial public offerings
- BOE Agents’ Summary of Business Conditions: some manufacturers reported that initial pass-through of weaker sterling near completion
- Italian June Industrial Production m/m: +1.1% vs +0.2% est.
- China July CPI y/y: 1.4% vs 1.5% est; PPI 5.5% vs 5.6% est.
- API inventories according to people familiar w/ data: Crude
-7.8m; Cushing +0.3m; Gasoline +1.5m; Distillates -0.2m
- Disney’s Iger Sees a Future Without Netflix, Comcast or DirecTV
- Goldman Sells U.K. Insurer Stake to GIC, Blackstone, MassMutual
- Canada Mulls Nicotine Cut as New Front Opens Against Smoking
- British American Tobacco Is Said to Extend Debt Binge in Europe
- New iPhone Models Are Said to Enter Mass Production: DigiTimes
- U.S. FDA Is Said to Issue Form 483 to Baxter Ahmedabad Site: CNBC
- Fox Is Said to Have Declined to Settle Suits for $60M: NYT
- Novo Sees Price of Insulin in U.S Dropping Again Next Year
- Ford Repairs Over 50 Police Units on Carbon Monoxide Concerns
*) In Asia, increased geopolitical tensions after a war of words between US and North Korea dampened global risk sentiment, which ensured the DJIA snapped a 9-day streak of record closes and saw nearly all Asia-Pac bourses in negative territory. This was after US President Trump warned North Korea the US would respond to any threats with an unprecedented level of fire and fury, which spurred a response from North Korea that it was considering striking Guam with mid-to long-range missiles. Nikkei 225 (-1.3%) underperformed as exporters suffered from the flows into JPY, while KOSPI (-1.1%) was also weighed on by the increased threat of nuclear war. Hang Seng (-0.4%) and Shanghai Comp (-0.2%) were subdued following a miss on Chinese CPI and PPI data, while ASX 200 (+0.4%) bucked the trend amid gains in the metals-related stocks and with the largest-weighted financials sector buoyed after big-4 bank CBA reported an 8th consecutive year of record profits. Demand for 10yr JGBs was spurred by a flight to quality and with the BoJ in the market for JPY 770b1n of JGBs. The curve also slightly flattened amid outperformance in the long-end. RBA Assistant Governor Kent states that fixed-income funding is available at favourable rates and that banks' use of wholesale debt is much lower than a few years ago. Further stating that AUD appreciation is more of a story regarding USD depreciation, adds further strength in AUD would result to slightly weaker domestic growth. South Korea Finance Minister sees limited risk impact on markets from North Korea.
- Chinese CPI (Jul) M/M 0.1% vs. Exp. 0.2% (Prey. - 0.2%)
- Chinese PPI (Jul) Y/Y 5.5% vs. Exp. 5.6% (Prey. 5.5%)
- Chinese CPI (Jul) Y/Y 1.4% vs. Exp. 1.5% (Prey. 1.5%)
# Top Asian News;
- Morgan Stanley Tops Goldman Sachs With Biggest Profit in Japan
- S. Korea Official Says Tension High, But Not A Crisis: Yonhap
- Markets on Edge in Seoul as Trump Escalates North Korea Warnings
- China Remains Inflation Backstop as Mills and Smelters Close
- India Is Said to Tweak HPCL Share Sale Terms to Skip Open Offer
- Gold Imports by India Are Said to Have More Than Doubled in July
- Wharf Soars to Highest Since ’86 on $29 Billion Spinoff Plan
- Abu Dhabi’s FAB Is Said to Appoint Pant International FIG Head
*) In European bourses, the selling persisted across virtually all markets with Trump's comments in North American trade has been the catalyst for the selling pressure seen in Global equities. US President Trump warned North Korea that a US response to any threats would be 'fire and fury the likes of which the world has never seen'. Comments followed from North Korea, with the state media stating that the US war hysteria will bring a miserable end, and also warns of operation on signs of US provocation, further saying that they are seriously mulling striking Guam. Adding to the downbeat was rather subdued inflation figures out of China. EGB yields falling to the lows amid the aforementioned escalating tensions between the US and North Korea. Peripheral bonds wider by around lbps against the German benchmark. Elsewhere, BATs have begun marketing form their multi-currency (GBP, EUR) 5 tranche after yesterday's chunky USD-denominated 8 part. Technically uncovered German Bobl auction.
# Top European News;
- Brexit Will Strain BOE’s Supervisory Resources, PRA’s Woods Says
- Italy Industrial Production Jumps, Pointing to Faster Recovery
- ABN Amro Bolsters Capital as Dutch Growth Drives Profit Rise
- Carl Zeiss Meditec Slides as Valeant Shuts Door on Target Assets
- Ahold Delhaize Boosts Synergy Goal as Competition Concerns Grow
- Russia Readies $4 Billion Eurobond Swap in Face of Sanctions
- EON Plots Growth Strategy as Profit Rebounds, Debt Falls
- Santander Sells Control of Popular Real Estate to Blackstone
# In currencies, the initial mover following the exchange from the USA and North Korea was USD/JPY, breaking through August's low, however finding some bids just below this 109.80 level. USD/CHF saw similar price action, attempting to test August's low around 0.9650. Traffic was clear at these levels, becoming key support in the pair, with bids clearly stacked around 0.9650. Sterling saw some early bullish pressure this morning, as cable broke 1.30 to the upside, with GBP/USD struggling to find any real direction as Brexit concerns continue. EUR/GBP saw some selling, however, failed to attempt to test 0.90 as bids are evident ahead of this key psychological level. The geopolitical uncertainties between Australia and China did cause some suffering of AUD, as AUD/NZD fell from 1.08, further weight was put on the currency with Central bank commentary from the RBA, as Kent said AUD appreciation is more of a story regarding USD depreciation, adds further strength in AUD would result to slightly weaker domestic growth.
# In commodities, safe haven flow supporting precious metals with Gold prices up a modest 0.6%, while crude prices have recoup from yesterday's lows following last night's large drawdown in the API report. Saudi and Iraqi oil ministers are to hold a joint press conference on Thursday in an attempt to stabilise oil markets....