S&P futures were little changed at 2,425, ignoring the N.Korea tensions of the past two days which will likely be a major topic in the upcoming G-20 summit, as European stocks fluctuate and Asian markets advance. Crude oil fell, snapping the longest winning streak this year, as Russia said it opposed any proposal to deepen OPEC-led production cuts.

Just like Tuesday, it was a session of two halves, with the Yen initially starting the day stronger as military tensions built up in Korean peninsula, and cash Treasuries breaking with a firmer tone as 10-year yield initially fell. Aussie reversed part of Tuesday’s losses despite a drop in Caixin PMI data, and Dalian iron ore 1.6% higher.

“North Korea has rattled markets but central bankers are more important,” said Kathleen Brooks, research director at City Index in London. “While North Korea’s military ambitions are a background threat for markets, we don’t think that this particular geopolitical event is at the stage yet where it will cause a spike in volatility.”

However as the session progressed, gold and the Japanese yen gave up early gains, with both the metal and the currency retreating. At the same time, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3 percent, regaining half the losses it saw on Tuesday when North Korea fired a missile into Japanese waters. South Korea’s main index rebounded by 0.36 percent and Japan’s Nikkei ended up 0.25 percent. Shanghai stocks rose more than 1 percent, despite a drop in the Caixin/Markit services purchasing managers’ index (PMI) to 51.6 in June, from 52.8 in May.

Of note in China is the continued aggressive tightening behind the scenes, with the People’s Bank of China refraining from offering funds in open-market operations for a ninth day, effectively draining more cash, in the past two weeks than it had injected from June 1 to June 19 amid quarter-end funding demand. The Chinese central bank has pulled 660b yuan since June 20, more than the 540b yuan it had injected from June 1 to June 19. The PBOC said there’s ample liquidity in the banking system, taking into account lenders’ reserve requirement payments and reverse-repo maturities. Sooner or later this latest tightening episode will hit risk assets and commodities, but not just yet. In fact, China’s 7-day repo rate dropped another 5bps to 2.71%, set for the lowest close since April 14. The overnight repo rate falls 14bps to 2.50%, heading for biggest decline in three monthsm while the cost of one-year interest-rate swaps declines 5bps to 3.42%.

Meanwhile, the dollar rose as U.S. stock futures and Treasuries traded sideways before the FOMC Minutes release today. The euro dropped and European stocks edged higher amid a slew of services data, and as investors await Thursday’s publication of the latest ECB minutes. The return in risk sentiment helped USDJPY push higher through 113.60, the highest since May 16 as EUR/JPY breaks to another YTD high; EUR/USD briefly spiked lower after ECB’s Coeure says the ECB has not been discussing policy changes. Gilts underperform after hawkish commentary from BOE’s Saunders overnight and duration heavy corporate issuance, short-end leads gilt curve steeper. Crude futures sold off on OPEC production concerns and Russian comments (see below) mid-morning amid heavy volume.

European equity markets initially rally from the open, DAX outperforms after Adidas upgrade; gains later fade as oil and gas stocks weigh. The Stoxx Europe 600 Index gained less than 0.1 percent after  surging 1.1 percent on Monday.  Futures on the S&P 500 Index were little changed. The cash index rose 0.2% Monday in a shortened session before the July 4 holiday.

While aside from FX, there were little notable moves, oil futures dropped 1.7 percent in New York, snapping eight straight sessions of gains. Russia wants to continue with the current deal and any further supply curbs would send the wrong message to the market, according to government officials. The U.S. dollar gained, reducing the appeal of commodities denominated in that currency

While prices have surged during the past week, oil remains in a bear market after concerns that rising global supply will offset output cuts from OPEC and its partners. Libya and Nigeria, exempt from the OPEC-led curbs, accounted for half of the group’s production boost last month, according to data compiled by Bloomberg.

Focus now shifts to the key event on Wednesday, the latest Fed minutes. “The FOMC minutes will be the major macroeconomic highlight as the U.S. returns from the Independence Day break,” Ipek Ozkardeskaya, a market analyst at London Capital Group, wrote in a note. “Lack of details regarding the Fed’s balance sheet policy could further weigh on U.S. yields and the dollar.”

“The more interesting aspect of the minutes is going to be what they have to say about the balance sheet, and in particular, if they give any hints about the time frame,” said Stephen Stanley, chief economist at Amherst Pierpont Securities in New York.

Should the minutes refer to financial conditions, reiterating comments from Yellen, Fischer and Williams, the market will have to assume that the Fed may be willing to ignore the current inflation undershoot, leaving markets with very little other option than trading closer to the Fed’s own interest rate projections as expressed by the dots, Morgan Stanley strategists say in a note to clients.

A shift towards more hawkish language by several major central banks has dominated the past week and left markets unsure of how much longer emergency stimulus in Europe will continue to support global asset prices. For now investors seem to be giving policymakers the benefit of the doubt that the global economy can take any tightening of monetary policy, although the latest data on Wednesday was mixed – strong in Europe and weaker in China.

Currency markets were in limbo, the euro trading just over half a cent below last week’s 14-month highs against the dollar. The dollar and yen were the main victims of the shift in language last week, but many analysts wonder whether the European Central Bank will be able to rein in money-printing later this year if the euro keeps gaining.

“I meet a lot of people while I talk to clients who think the ECB simply won’t be able to escape its current policy setting because a stronger currency is too damaging,” said Societe Generale strategist Kit Juckes. “The thought the ECB will resist pressure…is still leading many … to look for cheaper levels to buy euro.”

As a result, the Bloomberg Dollar Spot Index strengthened 0.2 percent. The British pound was 0.2 percent weaker at $1.2898. The euro also slipped 0.2 percent to &1.1326.

In addition to the drop in oil, safe haven gold was also weaker, dropping 0.1% to $1,222.35 an ounce, erasing an earlier gain of 0.5 percent.

In rates, the yield on 10-year Treasuries was little changed at 2.35%.  U.K. benchmark yields advanced four basis points to 1.28 percent.  French and German yields were little changed.

Factory orders and Federal Reserve minutes expected later.

Bulletin HeadlineSummary from RanSquawk

• Geopolitical tensions mount amid further missile testing from North Korea. North Korea aims to create an ICBM capable of hitting the US this year
• EUR sags as ECB’s Couere says the ECB has yet to discuss changing policy.
• Looking ahead, highlights include FOMC minutes and API Crude Inventories.

Market Snapshot

• S&P 500 futures little changed at 2,424.25
• STOXX Europe 600 up 0.1% to 382.4
• MXAP up 0.2% to 153.96
• MXAPJ up 0.3% to 503.49
• Nikkei up 0.3% to 20,081.63
• Topix up 0.6% to 1,618.63
• Hang Seng Index up 0.5% to 25,521.97
• Shanghai Composite up 0.8% to 3,207.13
• Sensex up 0.03% to 31,218.28
• Australia S&P/ASX 200 down 0.4% to 5,763.25
• Kospi up 0.3% to 2,388.35
• German 10Y yield rose 0.9 bps to 0.484%
• Euro up 0.04% to 1.1350 per US$
• Brent Futures up 0.08% to $49.65/bbl
• Italian 10Y yield fell 2.2 bps to 1.819%
• Spanish 10Y yield rose 1.3 bps to 1.538%
• Gold spot down 0.1% to $1,222.05
• U.S. Dollar Index up 0.1% to 96.33

Top Overnight News

• Fed Minutes May Give Clues on When Balance- Sheet Runoff to Start
• Kim Jong Un ’firmly determined and committed’ to test ICBM capable of hitting U.S. within this year: KCNA
• UN Set to Meet on North Korea as U.S. Confirms Rocket Was ICBM; U.S. says North Korean ICBM test represents a new escalation of threat
• European Jun. Service PMIs: Spain 58.3 vs 56.5 est; Italy 53.6 vs 54.6 est; France 56.9 vs 55.3 est; Germany 54.0 vs 53.7 est; Markit note a further easing in cost inflationary pressures, as input prices rose at the weakest rate since last November
• ECB’s Coeure: the Governing Council has not been discussing changes in our monetary policy, that may come in the future, but it hasn’t come yet
• BOE’s Saunders says prepare for rate increases ’at some point’: Guardian
• Germany sees Saudi-led alliance rejecting Qatar’s crisis response
• Russia said to oppose any move to deepen OPEC cuts at July talks
• Trump-Putin Talks Raise Anxiety Ex- Spymaster Will Get Upper Hand
• Stada Supervisory Board Said to Discuss Replacing CEO Wiedenfels
• ANZ Said to Narrow Bidders in $3 Billion Sale of Wealth Unit
• AIA, MetLife Said to Ready Binding Bids for ANZ Wealth Unit: AFR
• HSBC Said in Talks With U.S. to End Crisis-Era Mortgage Probe
• Monte Paschi’s Italian Rescue Wins EU Nod After Months of Talks
• Euro Area Faces Capacity Bottlenecks as Recovery Gathers Pace
• U.K. Recommends Alexion’s Strensiq for Rare Bone Disorder
• Elbit Europe Unit Gets $35m Contract for Electro Optic Systems
• Poland May Pick Lockheed to Supply Mobile Rocket Launcher System
• General Motors China June Vehicle Sales Rise 4.3% on Year
• Freeport Indonesia Is Optimistic Will Achieve Win-Win Solution

Asia equity markets were mostly higher as the region recovered from the opening losses triggered by heightened tensions in the Korean Peninsula after the recent North Korean missile test. ASX 200 (+0.1 %) and Nikkei 225 (+0.2%) were pressured for the majority of the session amid increased provocation by North Korea, although stocks in Japan returned flat with JPY price action as the main driver. China was initially subdued after Caixin Services PMI printed a 13-month low and as participants in Hong Kong were despondent from yesterday’s tech-led selling, in which Tencent dropped over 4% after a state backed paper branded its game as poison and called for tighter regulation. However, stocks in the region were also resilient as the Shanghai Comp. (+0.7%) and Hang Seng (+0.6%) gradually rebounded into positive territory. Finally, 10yr JGBs were subdued as sentiment gradually improved with 10yr JGB futures breaking below last week’s lows to test the 150.00 level to the downside. Chinese Caixin Services PMI (Jun) 51.6 vs. Exp. 52.9 (Prey. 52.8); 13-month low. (Newswires) – Caixin Composite PMI (Jun) 51.1 (Prey. 51.5)

Top Asia News

• U.S. Confirms North Korea Missile Was ICBM, Warns of UN Action
• Singapore July COE First Open Tender: Summary (Table)
• Alibaba Challenges Google, Amazon With New Echo-Like Device
• Flipkart, Snapdeal Said to Duel Over $100 Million Valuation Gap
• UN Set to Meet on North Korea as U.S. Confirms Rocket Was ICBM
• BHP’s New Chairman to Drive ‘Radical Shift’ at World’s Top Miner
• Essar Steel Launches Challenge to Stop Insolvency Proceedings
• Asia Stocks Rebound While Haven-Asset Demand Fades: Markets Wrap
• Freeport, Indonesia Eye Early Resolution to Grasberg Dispute

In European markets, risk appetite has been evident following the European cash equity open, despite Korean Peninsula geopolitical concerns continuing. Materials outperform, as Glencore trades up over 2% in the FTSE. Credit Suisse have noted the recent correlation between the oil names and mining names, as the recent reprieve seen in Oil markets seemingly benefiting the aforementioned mining names.
The risk on sentiment has been led by the treasury market, as yields continue to strengthen across the AAA’s. Increasingly hawkish commentary from the BoE, most recently BoE’s Saunders, has taken its toll on UK paper, with the weakness in Gilts leading to stops being run across the other majors. The lOy Bund is looking towards the 0.50% yield, with the T-note now trading around the 2.30% level. JPY has also seen continued bearish pressure, the noticeable mover in early FX trade, trading past the week’s high, now set to test 114.31 (May’s high).

Top European News

• Russia Said to Oppose Any Move to Deepen OPEC Cuts at Talks
• North Korea Says Missile It Fired Today Was An ICBM
• Yen Reverses Gain as Risk Sentiment Improves, Treasuries Drop
• Bunds Heavy as Stocks Gain, Bobl Lags; Gilts Hit on Issuance
• Baidu Snags 50-Plus Partners for its Apollo Driverless Car
• Qatar’s Antagonists Huddle on Next Steps as Deadline Expires

Looking at the day ahead, this morning in Europe the main focus will likely be on the remaining PMIs (services and composite readings). We’ll get final revisions for the Euro area, Germany and France as well as the first look at the data in the periphery and the UK. The other data due to be released this morning is May retail sales figures for the Euro area. Over in the US we’ll get May factory orders data and also final revisions to the May durable and capital goods numbers. This evening we’ll then get the FOMC minutes from the June meeting where it’ll be interesting to see how much of a debate there is around the inflation outlook given some of the Fed speak recently. Along with that, it’ll be interesting to see if there are any further details around balance sheet normalization. Away from the data German Chancellor Merkel is due to meet Chinese President Xi Jinping ahead of the G20 summit later this week.

US Event Calendar

• 10am: Factory Orders, est. -0.5%, prior -0.2%; Durable Goods Orders, est. -1.0%, prior -1.1%
  Factory Orders Ex Trans, prior 0.1%; Durables Ex Transportation, prior 0.1%
• Cap Goods Orders Nondef Ex Air, prior -0.2%; Cap Goods Ship Nondef Ex Air, prior -0.2%
• 2pm: FOMC Meeting Minutes

DB’s Jim Reid concludes the overnight wrap

Happy Boxing Independence Day. I’m sure there will likely still be lower than average volumes today as people take an extended break after yesterday’s celebrations. One interesting landmark about today is that it marks exactly 10 years since the last UK rate hike. Interestingly, if you look across the wider G20 then there are only 2 other central banks who can also say that they have gone at least 10 years since last hiking. One is Japan and the other is Saudi Arabia. Those two countries last hiked their benchmark rates in February 2007, so only a few months ahead of the BoE. It’s worth adding that we included  individual central banks within the EU (given that it is part of the G20) so the actual sample size was 43 (that also includes individual central banks as part of the ECB).

In an otherwise quiet start, central banks are one of the two main themes for markets so far this week. Indeed yesterday we heard from a couple more ECB speakers. The first was board member Peter Praet who, in a speech in Rome, preached for patience at the ECB given that inflation still needs “more time to show through convincingly in the data”. He also said that the ECB needs to be persistent given that the baseline scenario for future inflation “remains crucially contingent on very easy financing conditions which to a large extent depend on the current accommodative policy stance”. Fellow board member Ewald Notowny told an audience that the ECB should “normalize as soon as the economy allows” but that at the same time he “expects a long period of low rates”.

The other theme for markets in the last 24 hours is one of a geopolitical nature following confirmation that North Korea had fired an intercontinental ballistic missile yesterday – the first such missile launch of its kind by North Korea. US Secretary of State Rex Tillerson called the move a “new escalation of the threat” last night and that “global action is required to stop a global threat”. Tillerson also said that “any country that hosts North Korean guest workers, provides any economic or military benefits, or fails to fully implement UN Security Council resolutions is aiding and abetting a dangerous regime”. Russia’s  Putin and China’s Xi also condemned the move at a meeting in Moscow. The UN Security Council have announced that they will hold an emergency closed session on Wednesday to discuss the latest act while overnight we’ve learned that both the US and South Korea have conducted joint test missile launches of their own. One would have to imagine that this subject will dominate Friday and Saturday’s G20 summit agenda. As a reminder both President Trump and China’s Xi will be attending and it’s not gone unnoticed that tensions between the two leaders has been climbing in past couple of weeks.

That North Korea news appeared to be the catalyst which saw markets take a few chips off the table yesterday, albeit on thin volumes. The Stoxx 600 (-0.29%), DAX (-0.31%) and CAC (-0.40%) were all lower while Asia currencies were also weaker for the most part – particularly the South Korean Won (-0.34% and Taiwanese Dollar (-0.29%). Gold (+0.26%) rose for the first time in 6 days and is up another +0.31% this morning, while the Yen (+0.28%) is also a little firmer. Bond markets were pretty subdued with no real standout moves to highlight. The same can be said for WTI Oil which consolidated above $47/bbl despite some reports that Russia is opposing a proposal for a larger cut to production in the OPEC deal at the meeting later this month.

This morning in Asia markets have bounced back a bit following a soft start. The Nikkei (+0.07%), Hang Seng (+0.35%), Shanghai Comp (+0.24%) and Kospi (+0.17%) have all edged higher, although the ASX (-0.37%) is a shade lower. The gains in China are coming despite a reasonable decline in the Caixin services PMI to 51.6 in June from 52.8 the month prior. In Japan the Nikkei services PMI rose 0.3pts to 53.3 in June.

Moving on. With little in the way of interesting macro data yesterday (the only release being a soft -0.4% mom Euro area PPI reading for May), the more interesting data was the latest ECB CSPP and PSPP data. The former included monthly totals. Firstly the purchases settled last week implied an average daily run rate of €327mn against the average since CSPP started of €364mn. Although June’s purchases have dipped a bit the CSPP/PSPP ratio was 13.6% last month, down from 14.7% in May, but still above the average of 11.6% before the overall QE was trimmed in April. Further on this the average monthly run rate since April 2017 (after QE trimmed) has been €7.49bn (assuming 21 business days per month). The equivalent between July 2016 and March 2017 was €7.59bn (assuming 21 business day per month).

On the topic of the CSPP, Michal in my team has just published a report “CSPP Update Before the Summer Lull”. This short note provides an update on the latest pace of CSPP purchases, both in absolute terms and relative to the PSPP, and their split into primary and secondary. We show that the recent outperformance of CSPP-eligible bonds over (non-bank) ineligible ones has brought their relative pricing to where it was just before the US elections. We explain why we think the relative CSPP/PSPP trimming should only have a second-order impact on credit spreads.

With regards to the PSPP, the latest data for June revealed that the weighted average Bund maturity rose to 5.33 years from a record low 3.99 years in May. In fact that June average maturity is the highest since the changes to parameters came into full effect in February. That data also revealed a bit of deviation from the capital key for Bunds with total purchases €360m below implied levels. The flip side of that saw France (€1.1bn above capital key) and Italy (€0.9bn above capital key) both benefiting from higher purchases. Portugal (€690m below) continues to see the biggest miss relative to capital keys. Pondering on the swing in Bund purchases, our European rates’ strategists noted last month that as German purchases get closer to exhaustion at the front end, the Bundesbank would be somewhat forced to increase purchases at the longer end which may in part reflect the higher average maturity in June.

Looking at the day ahead, this morning in Europe the main focus will likely be on the remaining PMIs (services and composite readings). We’ll get final revisions for the Euro area, Germany and France as well as the first look at the data in the periphery and the UK. The other data due to be released this morning is May retail sales figures for the Euro area. Over in the US this afternoon we’ll get May factory orders data and also final revisions to the May durable and capital goods numbers. This evening we’ll then get the FOMC minutes from the June meeting where it’ll be interesting to see how much of a debate there is around the inflation outlook given some of the Fed speak recently. Along with that, it’ll be interesting to see if there are any further details around balance sheet normalization. Away from the data German Chancellor Merkel is due to meet Chinese President Xi Jinping ahead of the G20 summit later this week.

Update: According to the S. Korea military, the N. Korea’s missile flew more than 930km, before dropping into the sea. Separately, US Pacific Command said in statement that North Korea launched a land-based intermediate-range ballistic missile on Tuesday morning. The missile was tracked for 37 minutes and landed in the Sea of Japan.

* * *

North Korea fired an “unidentified ballistic missile” from a province near the border with China on Tuesday, South Korea’s military said. The launch took place just days after the South’s new President Moon Jae-In and US President Donald Trump focused on deescalation of tensions on the Korean peninsula in their first summit.

“North Korea fired an unidentified ballistic missile into the East Sea from the vicinity of Banghyon, North Pyongan Province, at around 9:40 a.m.,” the Joint Chiefs of Staff said cited by Yonhap.

The projectile reportedly landed in Japan’s Exclusive Economic Zone, Takahiro Hirano, Public Affairs Officer from Japan’s Ministry of Defense told CNN, an outcome which Tokyo may deem an act of aggression, and promptly retaliate against.

Japan’s Chief Cabinet Secretary Yoshihide Suga confirmed that the launch took place at 9:39 am and said that Japanese government would convene National Security Council Meeting; he added that Japan strongly protested to North Korea of its action.

“On Tuesday, at 09:39 [00:39 GMT on Tuesday] North Korea launched a ballistic missile. The flight has lasted for 40 minutes, the missile fell into Japan’s exclusive economic zone  in the Sea of Japan. By this hour, there is no information on the damage inflicted to Japanese aircraft and ships,” Suga said at a press conference.

Suga also said Prime Minister Shinzo Abe ordered to gather related information and analysis.

Shortly after the launch, Japanese Prime Minister Shinzo Abe said today’s missile launch by N. Korea is a clear indication that its threat is escalating, and added that N. Korea has ignored repeated warnings by international community.  Abe said confirmed strong ties with U.S. after speaking to President Donald Trump yesterday; Abe spoke to reporters in Tokyo after convening NSC meeting, remarks were carried on national broadcaster NHK. Abe also called on China and Russia to play a more “constructive” role.

On Monday, North Korea celebrated the day of strategic forces of the Korean People’s Army (KPA) with a statement in its state-run newspaper that the country’s rockets may strike anywhere in the world.

The newspaper reminded about recent successful launches of ballistic missiles Hwasong-12, Pukguksong-2, as well as cruise missiles. The situation on the Korean peninsula has become aggravated in recent months due to a series of missile launches and nuclear tests conducted by Pyongyang, all of which are claimed to be in violation of UN Security Council resolutions. The previous launch took place on June 8, when North Korea carried out a launch of short-range anti-ship missiles, reportedly flying some 124 miles before dropping into the Sea of Japan.

We expect a statement to be issued momentarily by the White House.