Global risk sentiment remained gloomy coming into Wednesday, with global European and Asian stocks sliding on growing concerns about North Korea and political inaction in the US, another hurricane bearing down on the US and the American debt ceiling looming. Industrial metals dropped as the latest Chinese commodity bubble appears to have peaked. Shortly before 6am a sharp risk-off move across asset classes was blamed on an erroneous North Korea earthquake tweet by the British Geological Survey.

In European markets, almost every sector of the Stoxx Europe 600 Index retreated after equities slid from Hong Kong to Sydney as traders prepared for potential news of intercontinental ballistic missile launch by Pyongyang. U.S. stock futures fluctuated, and the dollar edged lower with Treasuries a day after dovish comments from Federal Reserve officials sparked a bond surge. The Bloomberg Commodity Index retreated from the highest since April even as crude oil extended a rally.

“The 10 basis point fall in Treasury yields is clearly not something the European market can ignore,” said Mizuho rates strategist Antoine Bouvet. “The market’s also taking a bit of view on what the U.S. Federal Reserve will do next.”

Asia was also mostly in the red, with the MSCI Asia ex Japan index falling 0.5% and Tokyo’s Nikkei hitting a four-month low closing down 0.1%. South Korea’s KOSPI ended down 0.3% at a near four-week low as did Australia’s ASX. The Hang Seng Index declined 0.5% in Hong Kong on low volumes and China’s equity benchmarks were also lower.

According to Bloomberg the case for a continued risk-off tone was supported by a lack of consensus among the U.S., Russia and China on how to pressure Kim Jong Un to abandon his nuclear ambitions. Russian President Vladimir Putin rejected U.S. calls for more sanctions, echoing China’s resistance to more punitive measures. Still, despite the sharply lower “risk off” move in yields, equities refuse to budge and remain just shy of all time highs.

The euro rose for a third day, hitting 1.1950 again before paring gains, and shrugged off an unexpected decline in German factory orders which unexpectedly fell for the first time since April, declining 0.7% MoM, missing expectations of a 0.2% increase.

The euro was also stable ahead of the ECB announcement due in just over 24 hours: tomorrow Mario Draghi is expected to give more clarity on winding down the European Central Bank’s bond-buying program when he speaks after a policy decision on Thursday, even as he looks for ways to keep the common currency below 1.20.

Speaking of the Euro, in currency trading, the dollar was on the backfoot as geopolitical concerns continued to support the yen; as noted previously a delayed Twitter posting from the British Geological Survey on a North Korea earthquake caused a brief spike in the yen before investors realized it was a reference to last week’s nuclear tests. The Canadian dollar was steady ahead of BOC’s review, with economists forecasting policy makers to be on hold. The Bloomberg Dollar Spot Index held its 0.3 percent loss from Tuesday after Fed Governor Lael Brainard said the U.S. central bank needs to pay careful attention to underlying inflation before raising interest rates again, while Minneapolis Fed President Neel Kashkari said rate increases may be “doing real harm” to the economy.

“The broad-based theme appears to be justifiable caution despite the USD weakness stemming from dovish remarks from Brainard building on U.S. debt ceiling risks that have plunged UST yields, and correspondingly the USD,” said Vishu Varathan, Singapore-based head of economics and strategy at Mizuho Bank Ltd. “But the KRW is the dead give-away that risk aversion appears to be multi-faceted, and not a creature confined to the USD.”

In Asia, most emerging currencies (with the notable exception of the “safe trade” Yen) fell as concern over any potential fresh provocations from North Korea dominated sentiment, offsetting the impact of dovish comments from Federal Reserve officials. The won led losses, while Malaysia’s ringgit bucked the trend after oil prices jumped Tuesday.

The MSCI EM Asia Index of shares fell while bonds mostly rose. Among the Group-of-10 currencies, the yen rose against the dollar for a third day, while the Aussie erased gains after second-quarter economic growth missed forecasts.

U.S. Treasuries fell after 10-year yields tumbled to the lowest this year; Hurricane Irma was on a path that may bring it ashore in Florida and destroy so much property that damages may surpass Hurricane Katrina. The yield on 10-year Treasuries climbed two basis points to 2.08%.  Germany’s 10-year yield also gained two basis points to 0.35% while Britain’s 10-year gilt dipped less than one basis point to 1.026%.

There was some good news for oil bulls with Brent and WTI continuing their recent rally with futures in New York topping $49/bbl for 1st time since Aug 14. Brent also extends gains, hitting day-high $54/bbl, highest since May 25. Brent volume spiked to day-highs at 10:55am London time as prices broke through Tuesday highs.  Gold gained less than 0.05 percent to $1,340.08 an ounce.  The Bloomberg Commodity Index declined 0.1 percent to 85.29, the first retreat in a week.

Looking ahead, we get MBA mortgage applications, trade balance, Markit services PMI and ISM non-manufacture compositethe, while the Federal Reserve releases its Beige Book. Hurricane Irma, a strong Category 5 storm, could make landfall in Florida as early as this weekend.

Bulletin Headline Summary from RanSquawk

• Old earthquake reports shake markets
• AUD/USD initially reclaimed 0.8000 before moving back below the level following domestic Q2 GDP numbers
• Looking ahead, highlights include US ISM Non-Manufacturing PMI, BoC rate decision and APIs

Market Snapshot

• S&P 500 futures up 0.01% to 2,460.00
• MSCI Asia down 0.2% to 160.22
• MSCI Asia ex Japan 0.4% to 529.28
• Nikkei down 0.1% to 19,357.97
• Topix up 0.08% to 1,592.00
• Hang Seng Index down 0.5% to 27,613.76
• Shanghai Composite up 0.03% to 3,385.39
• Sensex down 0.4% to 31,697.02
• Australia S&P/ASX 200 down 0.3% to 5,689.73
• Kospi down 0.3% to 2,319.82
• STOXX Europe 600 down 0.4% to 372.16
• German 10Y yield rose 0.7 bps to 0.345%
• Euro up 0.3% to $1.1949
• Italian 10Y yield fell 3.9 bps to 1.707%
• Spanish 10Y yield rose 2.4 bps to 1.558%
• Brent Futures up 0.1% to $53.44/bbl
• Gold spot down 0.09% to $1,338.49
• U.S. Dollar Index down 0.1% to 92.12

Top Overnight News

• Russian President Vladimir Putin again rejected U.S. calls for new sanctions against North Korea after its sixth and most powerful nuclear test, echoing China’s resistance to more punitive measures to pressure Pyongyang into abandoning its atomic and missile programs
• North Korea: Putin and South Korean President pledge to continue diplomatic efforts
• Fed’s Kaplan: repeats Fed should be patient on rates, may still hike in 2017 but must see how inflation plays out
• Politico: Trump is continuing to push for lowering the corporate tax rate to 15% despite opposition within his own party, according to people familiar
• Hurricane Irma: classed as extremely dangerous major hurricane; increasing chance of direct impacts on Florida, according to the NHC
• German Aug. Factory Orders m/m: -0.7% vs +0.2% est.
• Merkel bloc lead grows as SPD loses support in Forsa poll
• The ECB will raise its 2017 GDP and possibly its 2018 GDP forecasts when it releases new macroeconomic projections on Sept. 7, according to a Bloomberg survey
• German factory orders fell in July ahead of general elections; adjusted for seasonal swings and inflation, declined 0.7% in July after a revised gain of 0.9% in June
• President Donald Trump’s decision to end an Obama-era program preventing the deportation of immigrants illegally brought to the U.S. as children risks a deep wedge between the Republican Party’s leaders and its conservative base ahead of next year’s congressional elections
• U.K. faces ‘break it, own it’ problem on Brexit, Irish say

Asia stock indices traded with a negative tone following the losses on Wall St. where markets reacted to the North Korean concerns, while financials led the selling amid declining yields and with insurers reeling from Harvey and the approaching Irma. This pressured ASX 200 (-0.4%) and Nikkei 225 (-0.1%), as financials in the region mirrored the underperformance in their US counterparts, while a slight miss in Australian GDP added to the sombre tone. Hang Seng (-1.0%) and Shanghai Comp. (-0.3%) also conformed to the downbeat sentiment with participants unimpressed by the PBoC’s resumption of open market operations from a 4-day hiatus, as this still resulted to a net daily drain of CNY 120bln. Finally, 10yr JGBs were marginally high with slight support seen from the risk averse tone, while the BoJ were also in the market although this was for a relatively reserved amount. PBoC injected CNY 20bln via 7-day reverse repos and CNY 20bln via 28-day reverse repos, for a net daily drain of CNY 120bln vs. Prev. CNY 70bln drain. PBoC set CNY mid-point at 6.5311 (Prev. 6.5370)

Top Asian News

• North Korea Threat Hits Hong Kong Stocks Even Harder Than Seoul
• Onshore Chinese Stocks Burst Into Life as Demand Surges
• Apple Refusal to Approve India Spam App Antagonizes Regulator
• Fingerprint Drops; UBS Cuts to Sell, Notes Chinese OEM Risk
• Noble Default-Swap Verdict in Play as Test of ISDA System
• Japan Equity Movers: Recruit, Optex, Iriso, Toshiba, CyberAgent

European bourses have been impacted by the risk off tone from American and Asian trade with 9/10 Stoxx 600 sectors trading
in the red. Much anticipation is set to be on tomorrow’s ECB decision, with range bound trade evident across EU markets. Stock
specific news sees UK homebuilders underperforming, with Barratt Developments down 3.4%, as some analysts point towards the
company’s poor outlook. Elsewhere sees insurance names underperform amid the hurricane concerns growing across the US. Consolidation has been the theme as we approach Draghi tomorrow; with bunds interested in a gap fill, trading around
yesterday’s low. The lack of direction shows in EZ/UK 10y yields, largely unchanged, as gilts await any French Brexit news or any
further North Korean developments.
The Spanish German spread is wider by 2.20 bps, ahead of supply tomorrow, supported by The Catalan Speaker’s Committee
voting 5-2 in favour of debating the referendum bill in Catalan parliament.
Germany sold EUR 2.436bln vs. Exp. EUR 3bln 0.0% 2022 Bobl with a b/c 1.6 (Prev. 1.0), average yield -0.36% (Prev. -0.26%)
and retention 18.8% (Prev. 24.5%)

Top European News

• German Factory Orders Fell in July Ahead of General Elections
• Hungary, Slovakia Lose Refugee Legal Case in Deepening EU Rift
• Iceland Plans to Shut the Door on Chinese Investors, Again
• Nova Development in London Voted Britain’s Worst New Building
• Shell Seeks to Boost LNG Demand in Order to Build New Plants
• Panmure Gordon Hires Ex-UBS Research Boss to Prepare For MiFID
• Deutsche Bank CEO Highlights Asset Bubbles on Excess Cheap Money

In currencies, the Australian GDP figure overnight saw AUD/USD fall back below the 0.8 handle that was claimed in trade yesterday.
AUD/NZD also follows the recent Aussie weakness and looks back toward the overnight low; with the previous resistance around
1.1 likely to be a target for bears.
USD/JPY has been the pair to watch, as Japanese buying interest has been touted around the 108.50 level, which has held
throughout the session. Further support is likely around these levels with YTD lows ahead of 108.
Australian GDP (Q2) Q/Q 0.8% vs. Exp. 0.9% (Prev. 0.3%). (Newswires)
Australian GDP (Q2) Y/Y 1.8% vs. Exp. 1.9% (Prev. 1.7%)

In commodities, the hurricane concerns in the US have led to the continued bid in oil markets, as WTI looks toward USD 49.00/bbl. Oil
trade in Asia has led to snapping up crude cargoes from the US after the closures, with possibly more closures inevitable.
Russia Energy Minister Novak stated OPEC and Russia may extend output cap deal if needed, while he also sees oil prices in
2018 at range between USD 45-55/bbl. (Newswires)
Motiva’s Port Arthur (603K BPD) is expected to initially return to 40% production by the end of this weekend. (Newswires)
Libya’s Sharara oil field re-opens after a 2-week pipeline blockage, according to sources. (Newswires)

Looking at the day ahead, we get the ISM
non-manufacturing PMI, the Fed’s Beige book, trade balance and final
Markit services and composite PMIs are also due. Away from the data, UK
PM Theresa May will face opposition leader Jeremy Corbyn in Parliament
and the IMF’s managing director Lagarde will speak at a conference in
Korea. Elsewhere, President Trump will also meet House Speaker Ryan,
Senate Leader McConnell and a few others to discuss the upcoming debt
ceiling.

US Event Calendar

• 7am: MBA Mortgage Applications, prior -2.3%
• 8:30am: Trade Balance, est. $44.7b deficit, prior $43.6b deficit
• 9:45am: Markit US Services PMI, est. 56.9, prior 56.9; US Composite PMI, prior 56
• 10am: ISM Non-Manf. Composite, est. 55.6, prior 53.9
• 2pm: U.S. Federal Reserve Releases Beige Book

DB’s Jim Reid concludes the overnight wrap

Tough to know where to start this morning following a surprisingly frantic day for markets yesterday. To be honest we’re struggling to pinpoint the root cause of the price action which saw 10y Treasury yields plummet back towards levels last seen on 9th November 2016 and flirt with a 1% handle and Gold rally to the highest since September 2016.

Instead it feels like you could take your pick from any combination of the following catalysts; (1) the latest escalation in rhetoric over the North Korea nuclear test, (2) some fairly dovish Fedspeak, (3) ongoing concerns about the looming debt ceiling, (4) the decision to end the DACA program, and (5) the threat of Hurricane Irma which has resulted in Florida announcing a state of emergency and adding to recent adverse weather events. That’s not to exclude Brexit, NAFTA discussions and the ongoing Trump-Russia investigation as others bubbling away in the background at the moment.

Before we look at some of those in more detail, in terms of markets and following the Labour Day holiday on Monday, the US initially walked back in and the early move was a reasonably modest risk-off one and certainly nothing that appeared out of the ordinary. However things quickly escalated from the late afternoon. At first it was the big rally for US Treasuries which stole the limelight. 10y Treasuries touched a new YTD low of 2.053% before ending at 2.060% and down 10.7bps on the day. That was strongest session since March 15th. 5y and 30y Treasuries were both 10bps lower, while the 2y10y spread hit just 77bps and the lowest since August 2016. Fed rate hike expectations were hit and December hike odds edged below 30%. Meanwhile Gold rallied +0.44% to $1339.7/oz and the usual safe havens like the Yen (+0.81%) and Swiss Franc (+0.30%) were bid up. In contrast, the S&P 500 (-0.76%) fell by the most since mid-August and ended a six-day winning streak. The Dow also closed -1.07% and the Nasdaq -0.93% while the VIX jumped over 20%. The sector moves told a story itself with Insurers tumbling in the wake of the Hurricane Irma threat (S&P Insurance sector down -2.07%) and Banks selling-off reflecting the move for bonds (S&P Banks sector down -2.38% and the most since May). On the other hand Energy stocks were one of the few sectors to enjoy a decent day after WTI Oil rallied +2.90% which makes the move for rates even more impressive. It’s worth noting also that a bumper day for US IG primary issuance seemed to have little side effect while the Treasury’s four-week T-bill auction – a decent barometer for the debt ceiling concerns – saw investors demand the highest yield since September 2008 at 1.30% and yields on existing T-bills maturing on October 5th and 12th jump by more than 4bps post the auction.

This morning in Asia, markets have followed the lead from US and are all in the red as we type. The Nikkei (-0.31%), Kospi (-0.50%), ASX 200 (-0.55%), Shanghai Comp (-0.30%) and Hang Seng (-1.05%) are all down. It’s worth noting that Chinese banks are weaker, likely impacted by one Republican Congressman calling out Bank of China as a potential sanction target and then Treasury Secretary Mnuchin saying punishing specific entities is an option. Elsewhere, 10y Treasuries are a shade weaker this morning (+0.9bps) along with US equity futures.

Back to some of those catalysts we highlighted at the top. Starting with North Korea, the most notable development yesterday was President Trump tweeting that he was allowing Japan and South Korea to “buy a substantially increased amount of highly sophisticated military equipment from the US” while South Korean newswires also suggested that North Korea was preparing a missile launch before Saturday. At the same time Russia President Vladimir Putin rejected calls for new sanctions on North Korea as proposed by Trump signalling some disconnect between world leaders on the appropriate path to take.

Staying with politics, the news yesterday that the Trump administration had controversially agreed to end the DACA program was met with a chorus of criticism from Chief Executives around the world. There was also some suggestion that the decision could throw something of a curve ball into GOP efforts to raise the debt limit should Democrats demand a legislative solution to DACA to perhaps link with a debt limit hike. That remains to be seen however. Meanwhile over at the Fed the most noteworthy comments came from Fed Governor Brainard. She said in a speech in New York that “my own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target”. She also said that “I am concerned that the recent low readings for inflation may be driven by depressed underlying inflation, which would imply a more persistent shortfall in inflation from our objective”. She made mention of there being a persistent shortfall from the Fed’s inflation target going back 5 years and also suggested that trend inflation may have moved lower.

In fairness, it is no secret that Brainard is a well-known dove but the comments still seemed to catch the market out. Minneapolis Fed President Kashkari followed up with some fairly dovish comments of his own later on noting that “It’s very possible that our rate hikes over the past 18 months are leading to slower job growth, leaving more people on the sidelines, leading to lower wage growth, and leading to lower inflation and inflation expectations.”

Closer to home the big news last night was the Guardian leaking that Britain will end the free movement of labour immediately after Brexit and bring in restrictions to deter all but highly-skilled EU workers. This came under the detailed proposals set out in an 82-page Home Office Proposal which for the first time detailed how the UK intends to approach the sensitive immigration issue. One has to imagine that this would not be taken well in Brussels and lends some weight to the hard Brexit case again. Whether or not this overshadows a planned speech by PM May later this month remains to be seen but it’ll be worth watching the EU reaction in the coming days.

Over in Italy, it’s worth noting an FT article highlighting that leading populist parties are toning down their anti-EU rhetoric ahead of next year’s election. Luigi Di Maio, the candidate from the leading Five Star movement party said the party’s call for a referendum on Italy’s euro membership would only be a “last resort” and a bargaining chip to force a relaxation in EU fiscal rules. Similarly, the candidate from the Northern league party noted that it wants to be prepared for a collapse of the Euro, but not “blow up the EU monetary system”.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, factory orders for July fell -3.3% mom, but were in line with expectations. The final reading for the headline July durable goods orders print was worse than expected, at -6.8% mom (vs. -2.9% expected), but core durable goods rose +0.6% mom, slightly above last month and core capital goods orders also rose +1.2% mom (vs. +1.0% previously).

Back in Europe, the final Eurozone service sector PMI for August came in at 54.7 (vs. 54.9 previously), with the revision mainly due to a -0.6pt revision in the French PMI to 54.9, which is the lowest reading since January. After the manufacturing PMI was confirmed at 57.4, the final reading for the Eurozone’s composite PMI was 55.7, unchanged versus July. DB’s Sidorov noted that the broad picture combines a gradual moderation in the services sector from strong levels, offset by new highs and increased capacity constraints in the manufacturing sector. Overall, the readings are still consistent with annual GDP growth of 2.5% for the Euro area. I n the UK, the service PMI for August fell 0.6pts to an 11-month low of 53.2 (vs. 53.5 expected), but the composite PMI was in line at 54.0, which points to a continuation of GDP growth at the 1.7% yoy rate recorded in 2Q.

Looking at the day ahead, Germany’s July factory orders will be out early in the morning (+0.2% mom and +5.8% yoy expected). Then we have the Italian retail sales for July. Over in the US, the ISM non-manufacturing PMI, the Fed’s Beige book, trade balance and final Markit services and composite PMIs are also due. Away from the data, UK PM Theresa May will face opposition leader Jeremy Corbyn in Parliament and the IMF’s managing director Lagarde will speak at a conference in Korea. Elsewhere, President Trump will also meet House Speaker Ryan, Senate Leader McConnell and a few others to discuss the upcoming debt ceiling.