Notes/Observations
Geopolitical risks fuels risk aversion following North Korea’s latest nuclear test over the weekend
Focus on ECB policy decision on Thursday as Draghi try’s to balance a smooth QE exit
Overnight/weekend
Korean Peninsula situation
North Korea confirmed its 6th nuclear test with the release of a hydrogen bomb (had a magnitude of equivalent to a 6.3 earthquake and speculated to be 4-5x the power of bomb dropped on Nagasaki). Before the test Leader Kim Jong Un inspected a hydrogen bomb that would be loaded on a new intercontinental ballistic missile
Reaction:
US Defense Min Mattis: Any threat to the US and allies will be met with ‘massive, overwhelming’ military response. He also said officials laid out military options to President Trump at a National Security Meeting
US President Trump tweeted that the US is considering stopping all trade with any country doing business with North Korea
US Treasury Sec Mnuchin said preparing new economic sanctions against North Korea
Japan PM Abe: agreed with Trump that pressure must be raised on NK
China President Xi and Russia’s leader Putin agreed to stick to the goal of the denuclearization of the Korean Peninsula, have close communication and coordination and properly respond’ to the test
China Foreign Ministry: Resolutely opposed and strongly condemned North Korea nuclear test. Strongly urged NK to stop wrong actions that worsen situation and would unswerving protect peace and stability of Korean peninsula. To comprehensively implement UN Security Council resolutions on NK; denuclearization of Korean peninsula
South Korea President Moon: Called from "strongest punitive measures" in response to North Korea nuclear test
Will push for further steps to isolate NK including new sanctions
Asia:
China President Xi reiterated view that domestic economy faced uncertainty, trade protectionism was rising. BRICS nations should offer solutions to boost free trade and that China would give CNY500M for BRICS economic and technology cooperation plan
Former PBoC Adviser Yu Yongding urged achieving free float of yuan currency rate as soon as possible. Improving economic situation provides opportunity to complete yuan exchange rate reform
Europe:
EU Commissioner Moscovici (France): Current euro level not threatening European corporate performance. Currency’s strength also depended on monetary policy, trusted the leadership and vision of ECB President Draghi.
Italy Fin Min Padoan: A strong euro will have very little economic impact on Italy
Italy 5-Star Party official Di Maio: Austerity policies have not worked, on monetary policy; Party has raised the issue of a referendum on the euro, as a bargaining tool, as a last resort and a way out if not listened to
Next Bank of Italy Gov will be named in Sept (2-months ahead of schedule) to help reassure markets ahead of 2018 budget presentation. Current BOI Gov Visco term expires in November and likely to be given another mandate
Germany Chancellor Merkel and center left candidate Schulz held only televised debate on Sunday, Sept 3rd. Various polls conducted during the first half of the debate, Merkel was viewed as more credible by a 33% to 17% margin.
Moody’s raises Portugal’s sovereign outlook to Positive from Stable; affirms Ba1 rating
Fitch affirms Germany sovereign rating at AAA; outlook Stable
Americas:
Treasury Sec Mnuchin reiterated Administration view that Hurricane Harvey funding should be tied to a move on the debt ceiling
Energy:
Colonial Pipeline: On Monday, to restart the Texas sections of its main distillate and gasoline lines
US Dept of the Interior’s Bureau of Safety and Environmental Enforcement: ~5.5% of current US Gulf of Mexico oil production is offline due to Tropical Strorm Harvey; ~10.5% of Gulf Nat Gas production remains offline
Russia Deputy PM Dvorkovich reiterated likely to support further extension of OPEC agreement to cut production
Economic data
(ES) Spain Aug Net Unemployment M/M: +46.4K v +12.0Ke
(EU) Euro Zone Sept Sentix Investor Confidence: 28.2 v 27.0e
(UK) Aug Construction PMI: 51.1 v 52.0e (12th month of expansion and lowest since Aug 2016)
(EU) Euro Zone July PPI M/M: 0.0% v 0.1%e; Y/Y: 2.0% v 2.1%e
Fixed Income Issuance:
(NO) Norway sold NOK3.0B vs. NOK3.0B indicated in 6-month Bills; Avg Yield: 0.37% v 0.39% prior; Bid-to-cover: 3.45x v 2.44x prior
SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM
Equities
Indices [Stoxx600 -0.6% at 373.9, FTSE -0.1% at 7428, DAX -0.5% at 12080, CAC-40 -0.5% at 5098, IBEX-35 -0.8% at 10243, FTSE MIB -0.4% at 21771, SMI -0.9% at 8863, S&P 500 Futures -0.4%]
Market Focal Points/Key Themes: European Indices trade lower across the board with geopolitical tensions once again at the forefront. Corporate news has been thin, with Acacia Mining under pressure after announcing reduction in operation at Bulyanhulu, and as a result cutting its full year outlook. Elsewhere Fiat Chrysler shares trades lower after noting it intends to move forward with the spin off of parts unit, following the absence of any major offer. Looking ahead corporate flow is expected to remain light with the closure of US markets in observance of Labor day.
Equities
Consumer discretionary [Samse [SAMS] +1.7% (Earnings), Johnson Service Grp [JSG.UK] +1% (Earnings), WizzAir [WIZZ.UK] -1.3% (Aug Metrics), Fiat Chrysler [FCA.IT] -1% (Plans to move forward with parts spinoff after no deal emerges)]
Materials: [Acacia mining [ACA.UK] -6% (To reduce operations at Bulyanhulu, cuts productions outlook)]
Industrials: [Victrex [VCT.UK] +5.9% (Trading update, CEO designate)
Healthcare: [Stada Arzneimittal [SAZ.DE] +2.0% (Nidda agrees to support domination and/or profit and loss transfer agreement)]
Speakers
ECB’s Mersch (Luxembourg): Trust in ECB is only gradually returning
PM May set to approve a politically explosive Brexit bill of up to £50B after the Conservative Party conference in October. Britain would pay £7-17B per year to Brussels for three years after Brexit before ending sizable direct payments into EU coffers in time for the 2022 general election. Aimed to kick start trade talks with the EU under current plans being drawn up
UK Brexit Min Davis refuted the Sunday Times report on Brexit bill; called its "nonsense"
North Korea said to be preparing another ICBM missile launch; launch expected around Sept 9th
South Korea said to be in talks on deployment of US carrier group and strategic bombers
China Foreign Ministry reiterated view that using force to resolve North Korea was NOT an option. North Korea was clear about China’s opposition to its nuclear tests. Called President Trump’s trade threat was unacceptable and unfair (**Note: Referred to US President Trump tweet that the US was considering stopping all trade with any country doing business with North Korea)
Russian Foreign Ministry: Working in tight cooperation with China on North Korea. Might react to US missile defense in South Korea
S&P analyst: Not considering any sovereign rating change for South Korea at this time but downward pressure was rising (**Note: Currently at AA; outlook stable)
Currencies
Geopolitical risks fuels risk aversion following North Korea’s latest nuclear test over the weekend. The traditional safe-haven currencies (and gold) outperformed. Dealers still placed a low probability of any full-scale conflict breaking out.
Focus on ECB policy decision on Thursday as Draghi try’s to balance a smooth QE exit. Analysts foresaw a gradual expiration of bond purchases but that decision might not come until Oct or even as late as Dec.
EUR/USD higher by 0.5% at 1.1920; USD/JPY at 109.50 and USD/CHF at 0.9565.
Spot gold higher by 0.8% at $1,335/oz
Fixed Income
Bund futures trade higher by 22 ticks at 165.08 on risk off flows following the tensions with North Korea in the far east. Continued upside targets 165.21 initially followed by 165.69, with initial downside support at 164.52 then 164.36.
Monday’s liquidity report showed Friday’s excess liquidity rose to €1.769T up €38B from €1.731T prior. Use of the marginal lending facility fell to €196M from €250M prior.
Corporate issuance saw Euro denominated issuance rise above €25B for the first time in 9 weeks . Thursday saw the bulk of the issuance with over €10B coming to market.
Looking Ahead
05:30 (NL) Netherlands Debt Agency (DSTA) to sell €1.0-2.0B in 6-month Bills
06:45 (US) Daily Libor Fixing
07:00 (IN) India announces details of upcoming bond sale (held on Fridays)
07:00 (BR) Brazil Aug FGV Inflation IGP-DI M/M: +0.2%e v -0.3% prior; Y/Y: -1.7%e v -1.4% prior
07:25 (BR) Brazil Central Bank Weekly Economists Survey
08:00 (UK) Baltic Dry Bulk Index
08:00 (ES) Spain Debt Agency (Tesoro) announces size of upcoming actions in week
09:00 (MX) Mexico July Leading Indicator M/M: No est v 0.21 prior
09:00 (SG) Singapore Aug Purchasing Managers Index (PMI): 51.2e v 51.0 prior
09:00 (FR) France Debt Agency (AFT) to sell combined €4.4-5.6B in 3-month, 6-month and 12-month Bills
09:30 (EU) ECB announces Covered-Bond Purchases
09:35 (EU) ECB calls for bids in 7-Day Main Refinancing Tender
09:50 (UK) BOE to buy £1.125B in APF Gilt purchase operation (3-7 years)
10:00 (DK) Denmark Aug Foreign Reserves (DKK): No est v 463.9 prior
11:00 (CO) Colombia July Exports: $2.9Be v $2.8B prior
12:00 (IS) Iceland Q2 Current Account (ISK): No est v 11B prior
15:00 (CO) Colombia Aug Total PPI M/M: No est v 1.7% prior; Domestic PPI M/M: No est v 0.5% prior
