European and Asian market and S&P futures have resumed their slide, as geopolitical tensions between North Korea and the U.S. spiked again overnight after Pyongyang responded to the latest set of warnings by Trump, revealing a plan to fire 4 ballistic missiles at Guam by mid-August. Gold gains for a third day while Brent rose above $53. Following de-escalation attempts by Rex Tillerson, and a NYT report that Trump's "fire and fury" statement had been improvised, markets saw a tentative recovery in risk appetite in overnight U.S. and early Asian trading, but a risk off mood returned again as Asian stocks fell back and London, Frankfurt and Paris dropped 0.5-1.2 percent in Europe, spooked by North Korea’s latest response to Trump, which dismissed as a "load of nonsense" warnings by President Trump that it would face "fire and fury" if it threatened the United States and in which a general outlined a detailed plan on state TV to fire four Hwasong-12 ICBM at Guam by mid-August, sending virtually every Asian market lower. "Sound dialogue is not possible with such a guy bereft of reason and only absolute force can work on him" North Korea said of its diplomacy with Trump.
Asia took the brunt of tonight's selloff, with Japan’s Topix index ended less than 0.1 percent lower, while South Korea’s Kospi index slid 0.4 percent, adding to a 1.1 percent drop on Wednesday. The Hang Seng Index in Hong Kong fell 1.1 percent. Australia’s S&P/ASX 200 Index lost 0.1 percent. The MSCI Asia Pacific Index fell 0.5 percent. The won dropped to a four-week low and was trading 0.6 percent down, while the Japanese yen rose 0.2 percent to 109.80 per dollar, the strongest in eight weeks.
"We saw a tentative recovery in risk appetite yesterday from the sell off inspired by North Korea but I think, justifiably that move is fading a little bit today," said Saxo Bank's head of FX strategy John Hardy.
With the escalating war of words rumbling on, Europe's German bund yield held near six-week lows. U.S. and British equivalents were also trading a touch above Wednesday's six-week lows. "We would currently be careful with a whiff of risk aversion in the air and, by extension, also stay away from shorts in the rates market," RBC said.
As a result of the ongoing diplomatic fiasco, the Stoxx Europe 600 Index headed for a second day of declines, following declines in markets from Hong Kong to Tokyo to Sydney, which also pressured S&P index futures fell. The greenback was firmer against most of its G-10 peers. Japan’s yen edged higher, extending yesterday’s increase as havens including gold continued to find support. Oil held gains above $49 a barrel as U.S. production eased and crude inventories extended declines.
“The North Korea situation is still unstable and investors are controlling risk and taking profit after recent gains,” said South China Financial Holdings.
Geopolitical tensions also pushed euro-area volatility sharply higher, with the VStoxx Index surging 27% since Tuesday’s close as European stocks added to their losses. The Stoxx 600 falls 0.6%, set for biggest back-to-back declines in three weeks, as the DAX hits lowest since April 21, down 2% so far this week. All European industry groups declined, with miners and energy shares faring the worst.
Utilities outperform selloff, sector is recommended by HSBC as a defensive refuge should European equities undergo a correction
In currencies, as noted above, South Korea’s won led losses in emerging Asian currencies as tensions over the peninsula heightened.
“USD/Asia should be somewhat supported today given the rise in geopolitical risk as North Korea and Trump keep up their back and forth,” said Julian Wee, a senior market strategist at National Australia Bank Ltd. in Singapore. “The weakness in equity markets suggests that the incendiary rhetoric has spooked the markets.”
Traders added to positions in haven currencies such as the yen and Swiss franc, and pushed up the dollar index by unwinding some of the recent bets on the euro; the yen rose for a third day, outperforming all other Group-of-10 currencies. Unrelated to Korea, the NZD was the notable underperformer overnight after the RBNZ monetary policy decision. The rate decision itself was met with choppy price action. However, the downside largely stemmed from comments by RBNZ Assistant Governor McDermott who stated that "NZD needs to adjust lower", which saw NZD break through 0.7300, and was trading at 0.726 last. In China, the onshore yuan rises for 10th straight day vs trade-weighted basket to highest in nearly five months as People’s Bank of China strengthens fixing by most since June.
As Bloomberg reports, as global investors turn increasingly risk averse amid tense relations between North Korea and the U.S., China’s currency is becoming an unlikely winner.
The yuan is the best performer among 31 major peers since Friday, rising 1.1 percent to 6.6605 against the greenback. That compares with a 1.5 percent tumble by the South Korean won or a 0.5 percent drop by the Australian dollar. While China is North Korea’s key ally, the nation’s central bank has been supporting the yuan with a series of strong fixings, and bearish bets against the currency have receded after it rose above 6.7 per dollar...
In addition to geopolitics, some of the biggest names in the asset management industry have already been warning that it’s time to take risk off the table. As reported yesterday, Pimco told investors to pare exposure to U.S. equities and junk bonds, but keep exposure to real assets, including commodities and gold. Separately, T. Rowe Price said it cut its stock allocation to the lowest level since 2000. Morgan Stanley strategists said investors should consider betting against U.S. junk-bonds as recent price weakness may be the beginning of a correction.
In commodities, safe haven gold rose 0.1 percent to $1,278.04 an ounce, the strongest in two months. West Texas Intermediate crude climbed 0.4 percent to $49.75 a barrel, the highest in more than a week, while Brent traded 0.8%, to $53.20
Today we get July PPI data (for core, 0.2% mom and 2.1% yoy expected), the monthly budget statement (-$54bn) and initial jobless claims and continuing claims figures. Fed’s Dudley will also speak today. Notable companies reporting include Nvidia, Snap, Macy’s and Newscorp.
# Market Snapshot;
- S&P 500 futures down 0.3% to 2,465.50
- STOXX Europe 600 down 0.4% to 378.41
- Nikkei down 0.05% to 19,729.74
- Topix down 0.04% to 1,617.25
- Hang Seng Index down 1.1% to 27,444.00
- Shanghai Composite down 0.4% to 3,261.75
- Euro down 0.3% to 1.1729 per US$
- Brent Futures up 0.6% to $53.03/bbl
- Gold spot up 0.1% to $1,278.98
- U.S. Dollar Index up 0.2% to 93.70
# Top Overnight News;
- South Korea and Japan warned North Korea that it would face a strong response if it carried through with a threat to launch a missile toward the U.S. territory of Guam
- North Korea says ‘sound dialogue not possible’ with Trump; considering plan for striking at Guam through simultaneous fire of four missiles
- U.S. inflation is finally picking up, or at least that’s the expectation of economists who have been wrong-footed by sub-par readings four months in a row
- Glencore Plc built a war chest in the first half of the year, continuing to cut debt as the world’s largest commodities trading house prepares to ramp up acquisitions
- West Virginia Governor Jim Justice said Donald Trump is “really interested” in his plan to prop up Appalachian mining by giving federal money to power plants that burn the region’s coal
- U.K. June Industrial Production m/m: 0.5% vs 0.1% est; ONS notes North Sea oil fields did not shut down for summer maintenance as normal, supporting production
- Norway July CPI y/y: 1.5% vs 1.4% est; core CPI 1.2% vs 1.1% est.
- RBNZ’s Wheeler: Would like to see a lower exchange rate, intervention in FX market is always open to us; Assistant Governor McDermott says RBNZ changed NZD language in a step toward intervention
- China Securities Journal: Govt. will soon release a package of measures to reduce leverage of state-owned enterprises; especially investments by central SOEs in financial sector
- Trump Seen Bypassing Acting FTC Chief in Favor of Outsider
- Disappointing U.K. Manufacturing, Trade Cap Sluggish Quarter
- Facebook Introduces Watch as New Platform for Shows
- NY Orders Con Edison to Take Action on Subway Power Reliability
- Perrigo Full Year Adjusted EPS Forecast Tops Estimates
- Monsanto Judge Angered by Lawyer’s Release of Roundup Documents
- Pepper Group Accepts KKR’s A$3.60-a-Share Cash Offer
- Facebook’s ‘Dazzling’ Stock May Belie Long-Term Risks: Grant’s
- MUFG Realizes Money Alone Can’t Build a Truly Global Bank
- Glencore Slashes Debt as It Positions for M&A in Commodities
*) Asian indices tried to pick themselves up from the recent geopolitical-triggered losses, but failed and the upside gradually fizzled out throughout the session which saw the region's bourses negative across the board. ASX 200 (-0.2%) and Nikkei 225 (-0.1%) failed to sustain the early gains as financials dragged Australia lower, while Japanese stocks reversed ahead of tomorrow's Mountain Day holiday. Markets in China lagged with the Shanghai Comp (-0.4%) dampened by a lukewarm liquidity operation and with China considering measures for deleveraging in state-owned enterprises, while Hang Seng (-1.1%) underperformed as investors used the escalation of global tensions as an opportunity to book profits in the index which had already surged by around 25% YTD. Finally, 10yr JGBs traded flat as the risk sentiment in Japan lacked conviction and with the BoJ's Rinban announcement somewhat tepid. On Thursday, the PBoC injected CNY 50bln in 7-day reverse repos and CNY 40bln in 14-day reverse repos. The PBoC set CNY mid-point 6.6770 at (Prey. 6.7075
# Top Asian News;
- Toshiba Reports Loss With Auditor’s Qualified Endorsement
- China Mobile Shares Surge as Carrier Adds Special Dividend
- SEC Delays Decision on Chinese Buyout of Chicago Exchange
- It’s Hard to Price an ‘Extinction Event’ Like a North Korea War
- South Korea, Japan Warn Kim Against Firing Missile at Guam
- Philippines Keeps Benchmark Rate at 3%, in Line With Forecasts
- Natco Tumbles to 6- Month Low on Expected Delay in Sclerosis Drug
- Malaysia Warns Traders Against Ringgit Derivatives in Singapore
- Billionaire Wang Plans Overhaul of Property Assets, Wanda Unit
*) Another morning of declines in Europe with geo-political tensions at the forefront of investors' minds. Slight underperformance in the FTSE 100 amid a slew of Ex-Divs from a number of large cap names taking off roughly 40ppts. On a stock specific basis, much of the price action has been dictated by earnings with Adecco, Lanxess and Henkel among the worst performers following soft financial reports. Very quiet on this front with yields ticking up slightly across the German curve, peripheral spreads wider, albeit mildly so.
# Top European News;
- Prudential Interim Dividend Per Share 14.5p
- Thyssenkrupp Debt Soars on Negative Third-Quarter Cash Flow
- Zurich Insurance CEO Greco Sees ‘Positive’ Signs for Dividend
- Dong Sees Early Shareholder Returns as Offshore Costs Tumble
- Adecco Slides as Sales Miss Estimates Amid Downturn in Hiring
- Mail.ru’s Russian Food Deliveries Surge as Sales Beat Estimates
- U.K. Homebuilders Slip as Residential Price Growth Slows Further
- Russian Gas Link Offshoot Taps Investors as Sanctions Swirl
- Shopping Cart Shows ECB Buying Italy Over France as Bonds Mature
# In currencies, the NZD was the notable underperformer overnight post the RBNZ monetary policy decision. The rate decision itself was met with choppy price action. However, the downside largely stemmed from comments by RBNZ Assistant Governor McDermott who stated that "NZD needs to adjust lower", which saw NZD break through 0.7300. USD at better levels against its counterparts today, tensions remain at elevated levels between the US and North Korea, although focus is slightly edging towards key US data with US CPI figures to be released tomorrow. But, before that we get the PPI numbers out at midday. GBP saw a brief uptick to pare some of its losses this morning following firm than expected industrial output figures, however much of the other data had been erring to the softer side with the trade balance showing a wider deficit than analysts had expected.
# In commodities, oil prices up this morning with Brent breaking through USD 53 for the first time since May, however failed to consolidate above and has since retraced some of its gains. Precious metals also hovering at elevated levels. Gold rose 0.1 percent to $1,278.04 an ounce, the strongest in two months.
# Looking at the day ahead, there is the July PPI data (for core, 0.2% mom and 2.1% yoy expected), the monthly budget statement (-$54bn) as well as the initial jobless claims and continuing claims figures. Fed’s Dudley will also speak today. Notable companies reporting include Macy’s and Newscorp....