Yesterday morning, with the US closed for holiday but with S&P futures trading modestly lower on the latest set of North Korean geopolitical fears, we asked "is this time different", referencing last week's similar setup, when futures gapped lower on Monday after the Kim regime shot a missile over Japan, only to surge into the end of the week.

Well, as of this morning, it seems that traders are eager to buy the latest dip, as US futures pared yesterday's losses before markets reopen after the Labor Day holiday, as global stocks looked to put any North Korean unpleasantries into the rear view mirror and assume another happy ending: Japanese shares fell fractionally overnight, but the decline was modest as yen gains appear to have stabilized, while Asia ex Japan was higher and Europe has already moved on with bourses on the continent glowing green ahead of Thursday’s ECB meeting.

In a nutshell, North Korean risks remain just below the surface as U.S. markets reopen following long weekend. U.S. equity futures continue to remain in a tight range midway between Friday close and Globex reopening gap-lower precipitated by ICBM news from Korea. European equities open higher and rally further, led by German DAX, future closes Friday upside gap. Auto sector well supported after GM reports record Aug. China vehicle deliveries. Merck KGaA (+3.5%) also outperforms after divestment reports; energy stocks lifted as crude futures push through yesterday’s high. USD trades broadly flat, AUD marginally supported by comments RBA’s Lowe on continuing current policy. USD/JPY partially unwinds overnight risk-off move lower, TRY underperforms EMFX after political warning from Merkel. German curve slightly steeper with peripheral spreads tightening; USTs remain within yesterday’s range

The biggest dip buyers so far emerged in Europe, where most industry sectors in the Stoxx Europe 600 Index gained as data from China to the euro area pointed to more growth for the global economy. Confirmation that euro zone business activity remained robust last month helped the pan-European STOXX 600 to claw back most of the 0.5 percent it lost on Monday amid international condemnation of the previous day’s nuclear test

Meanwhile Asian markets were somewhat less euphoric: overnight China’s Caixin/Markit services PMI rose to 52.7 in August, the highest reading in three months. The market reaction to that was muted, however, with sentiment in Asian equity markets still subdued. Chinese bourses eked out small 0.2-0.3 percent gains but Seoul and Tokyo remained red. Speaking at a summit of the world’s biggest emerging economies in China, Russian President Vladimir Putin again warned that threatening military action against North Korea could trigger “a global catastrophe”. “Russia condemns North Korea’s exercises, we consider that they are a provocation ... (But) ramping up military hysteria will lead to nothing good,” he told reporters.

As with many political risk plays over the past couple of years, market moves suggested a reluctance to price in tail risks on every possible bad outcome and more of a focus on the prosaic but upbeat global economic picture. As we showed yesterday, it has taken markets roughly 31 days on average to "fill the gap" from all post-WWII geopolitical shocks, and this time appears to be no different.

Which while understandable, is in some ways is odd, because the escalation from a potential nuclear war with North Korea shows no signs of abating: President Trump agreed to support billions of dollars in new weapons sales to South Korea after North Korea’s largest nuclear test, while the US ambassador to the United Nations, Nikki Haley said America would seek the strongest possible sanctions against Kim Jong Un’s regime. Tensions escalated after Asia Business Daily reported North Korea was preparing to fire an ICBM missile.

In currencies, the early risk off tone has dampened in early European trade, as CHF and JPY have both lost ground against their main counterparts. The Dollar recovered from earlier losses as investors unwound shorts built on Monday as Treasuries pared gains while bunds fall, though still trade higher from Friday on persistent haven demand amid a report that North Korea is preparing to fire an intercontinental ballistic missile before Saturday. 

The RBA kept rates on hold, as expected at 1.5%, with markets fairly unfazed. Immediate slight depreciation was seen in the AUD, reacting to comments from the RBA stating that a rise in AUD would lead to slower economic growth than otherwise, however, the 20-pip fall was quickly retraced. 0.8 continues to behave as resistance in AUD/USD as the August high continues to hold. Yen gains were limited. Perhaps the biggest surprise was the tumble in the onshore yuan, which after a record long rise of more than two consecutive weeks, suffered its biggest drop since Feb. 7 as the greenback erased earlier losses and the PBOC set a weaker-than-expected fixing. The CNY slid 0.29% to 6.5502 per dollar as of early morning trading. The PBOC strengthened the yuan reference rate by 0.45% to 6.5370, however this was less than the average Bloomberg survey estimate of 6.5291.

In rates, treasuries erased earlier gains and bunds slipped from the open as European stocks rose and German PMIs print stronger than forecast. The yield on 10-year Treasuries fell two basis points to 2.14 percent; Germany’s 10-year yield increased one basis point to 0.37 percent; Britain’s 10-year yield gained one basis point to 1.057 percent.

In commodity markets, U.S. WTI oil prices edged higher, while U.S. gasoline prices slumped to pre-Hurricane Harvey levels, as oil refineries and pipelines in the U.S. Gulf Coast slowly resumed activity, easing supply concerns. WTI crude futures ticked up 0.2% to trade at $47.38 per barrel, though global benchmark Brent prices barely budged at $52.37. The reassuring China PMI data helped copper hit a three-year high in industrial metals markets, and nickel hovered near a 14-month peak.

Meanwhile, bitcoin BTC=BTSP dropped further from Saturday's all-time high of $4,979.9 to trade at $4,012. China said on Monday it was banning the practice of raising funds through launches of token-based digital currencies, known as initial coin offerings (ICOs).

Economic data include July factory orders, several Fed speakers are due. Companies reporting earnings include Hewlett Packard Enterprise and HealthEquity.

Bulletin Headline Summary from RanSquawk

• Asian equities traded with little in the way of firm direction amid upbeat Chinese data and lingering geopolitical concerns
• RBA kept the Cash Rate Target unchanged as expected and noted slow income growth
• Looking ahead, highlights include: US factory orders, Fed’s Brainard, Kashkari and Kaplan

Market Snapshot

• S&P 500 futures down 0.2% to 2,469.75
• STOXX Europe 600 up 0.4% to 375.72
• MSCI Asia down 0.1% to 160.04
• MSCI ASia ex Japan up 0.2% to 530.88
• Nikkei down 0.6% to 19,385.81
• Topix down 0.8% to 1,590.71
• Hang Seng Index unchanged at 27,741.35
• Shanghai Composite up 0.1% to 3,384.32
• Sensex up 0.2% to 31,772.63
• Australia S&P/ASX 200 up 0.07% to 5,706.23
• Kospi down 0.1% to 2,326.62
• German 10Y yield rose 1.0 bps to 0.376%
• Euro down 0.1% to $1.1882
• Italian 10Y yield fell 3.9 bps to 1.746%
• Spanish 10Y yield rose 0.4 bps to 1.553%
• Brent Futures up 0.1% to $52.40/bbl
• Gold spot down 0.3% to $1,330.41
• U.S. Dollar Index up 0.04% to 92.68

Top Overnight News

• There is a high chance North Korea will fire an ICBM missile before the Sept. 9 foundation day after the Pyongyang regime started moving such a weapon, Asia Business Daily reported Tuesday, citing unidentified intelligence officials.
• Hurricane Irma has strengthened into a Category 4 storm as it approaches the Leeward Islands; reports from the Hurricane Hunter aircraft indicate that the maximum sustained winds have increased to near 140 mph (220 km/h) with higher gusts
• United Technologies Corp. agreed to buy Rockwell Collins Inc.for about $23 billion, creating an aerospace behemoth that can outfit jetliners and warplanes from tip to tail
• Prime Minister Theresa May is to use a speech on Sept. 21 to try to force the pace of Brexit negotiations as an October showdown with her European counterparts looms, EU Parliament Brexit coordinator Verhofstadt says
• Nafta: latest talks are nearing conclusion without a major breakthrough or agreements on even the least-contentious topics according to people familiar
• European Aug. Service PMIs: Spain 56.0 vs 57.0 est; Italy 55.1 vs 55.5 est; France 54.9 vs 55.5 est; Germany 53.5 vs 53.4 est; U.K. 53.2 vs 53.5 est.
• RBA’s Lowe: stimulatory policy continues to be appropriate; lower rates would have increased medium-term risks; an appreciating AUD would hit tourism
• Merkel: will press for EU to break off accession talks with Turkey
• Russian Energy Minister: extension of output cut deal is an option, have already discussed with Saudi Arabia but no decision yet
• China Aug. Caixin Services PMI: 52.7 vs 51.5 prev.
• Trump and Moon Agree to Show Muscle After North Korea Nuke; Trump Confronts Accelerating Russia Probes on Multiple Fronts
• Putin Rejects Sanctions as Ineffective Against North Korea; Putin Says Trump’s ‘Not My Bride,’ But Still Hopes for Detente
• Activist Fund Takes Stake in Millicom to Push M&A, Africa Exit
• Latest Nafta Talks Said to Near End Without Big Breakthrough
• Big Win Has U.S. Investors Wanting More From European Stocks
• September’s Bringing Tons of Catalysts to Shatter Market Calm
• Cellectis Cancer Trials Suspended by U.S. FDA After Fatality
• U.K. Minister Bradley Receives Regulator’s Response on Fox-Sky
• Google, Xiaomi Revive Stalled Android One Program for India
• Euro Area Poised for Fastest Economic Expansion in a Decade

Asia equity markets traded with a mixed tone as the region mulled over encouraging Chinese PMI data and the lingering North Korea concerns. ASX 200 and Nikkei 225 both failed to sustain an early rebound and traded in mild negative territory, with financials weighing on Australia alongside ongoing money laundering issues at CBA which is the largest constituent in the index. Shanghai Comp. and Hang Seng traded choppy and struggled to maintain the early optimism from strong Chinese Caixin Services and Composite PMI data, as geopolitical woes remained at the forefront of attention and after the PBoC refrained fromopen market operations for a 4th consecutive occasion. Finally, 10yr JGBs were slightly weaker despite the cautious risk tone in Japan, as today’s 10yr JGB auction results showed weaker demand with b/c lower than prior while the tail in price also widened. Chinese Caixin Composite PMI (Aug) M/M 52.4 (Prev. 51.9) Chinese Caixin Services PMI (Aug) 52.7 vs. Exp. 51.8 (Prev. 51.5)

Top Asian News

• Xi, Modi Seek Stable Ties After Worst Border Spat Since 1962
• China’s Xi Sees Risks to Global Economy, Opposes Protectionism
• Modi’s 10 Million Jobs Challenge May Be Biggest Re- Election Risk
• Man Whose Gear Found VW Fraud Says Diesel’s Death Overstated
• Noble Group Expects to Find Buyer for Oil Business by End-Sept
• Noble Group’s Shareholders Approve Gas & Power Sale in SGM Vote
• Recruit, Japan Post Holdings to Be Added to Nikkei 225

European equity markets opened marginally higher this morning, as investors seemingly shrug off fears of a sell-off amid North Korean led geopolitical concerns. Equity specific news has been headlined by Aveva and Schneider Electric making the deadline with their tie-up, as the British Co. jumped 25%. Fixed Income markets have seen some slow and tentative selling, as peripheral spreads marginally tighten. The 10y Italy/ Germany spread has seen support at 165bps, with further support expected at 160. The Spain/ German 10 traded to 112bps last week, however has followed the tightening nature and now trades around 105bps. Corporate issuance has been a theme of the day, with GlaxoSmithKline announce a 3-part EUR deal and Disney naming banks for its 5y Eurodollar bond The UK's DMO have opened books to sell their 5% 2065 Gilt with guidance seen at +0.5-0.75bps to UKTs.

Top European News

• Schneider to Take Control of U.K.’s Aveva in Software Merger
• Angry Birds Maker Plans IPO That May Value It at $2 Billion
• Merkel Says Diesel Needed as Bridge Technology to Electric Cars
• Merkel to Press EU Leaders on Ending Accession Talks With Turkey
• U.K. Economy Loses Steam as Services Weaken More Than Forecast
• Payments Firm Nets Hit by Sudden Selloff as M&A Talks Drag On
• GAM Holding Is Said to Pick New London Base After Brexit U-Turn
• Warhammer Maker Tops U.K. Stock Gains for 2017 as Profit Surges

In currencies, the risk off tone has dampened in early European trade, as CHF and JPY have both lost ground against their main counterparts. NZD outperforms, as NZD/USD looks to break out from Septembers range, with Kiwi traders set to await the GTD auction later. The RBA kept rates on hold, as expected at 1.5%, with markets fairly unfazed. Immediate slight depreciation was seen in the AUD, reacting to comments from the RBA stating that a rise in AUD would lead to slower economic growth than otherwise, however, the 20-pip fall was quickly retraced. 0.8 continues to behave as resistance in AUD/USD as the August high continues to hold.

In commodities, a marginal bid was seen in WTI and Crude futures, as September’s highs were broken. Elsewhere, the window for refiners in Asia
to grow profits does, as opportunity is slowing in order to replace the production lost in the US amid Hurricane Harvey. OPEC news sees commentary from Iran, stating that OPEC members compliance with the agreement has improved in recent months, with the minister stating yesterday that unofficial talks were underway among the oil producing countries to extend their cuts next year. Iranian oil minister Zanagneh says that unofficial talks are underway to extend OPEC/non-OPEC production cut deal. OPEC Secretary General says OPEC will continue its ongoing efforts to ensure much needed stability in the oil market, to contribute to mitigating any disruption to current or future supply following Hurricane Harvey. Azerbaijan oil production for August stood at 734.8k bpd, according to the energy ministry.

Looking at the day ahead, this morning the UK and Italy’s service and composite PMIs for August are due. Then there are final readings for the service and composite PMIs for the Eurozone, Germany and France. Elsewhere, the Eurozone’s retail sales and final readings for 2Q GDP are also due. Across the pond, factory orders for July and final readings for durable and capital goods orders will be released. Onto other events, the US congress returns from the August recess and Fed Governor Brainard, Minneapolis Fed President Kashkari and Dallas Fed President Kaplan will speak at separate functions.

US Economic Data

• 10am: Factory Orders, est. -3.25%, prior 3.0%; Factory Orders Ex Trans, prior -0.2%
• 10am: Durable Goods Orders, est. 1.0%, prior -6.8%; Durables Ex Transportation, prior 0.5%
• 10am: Cap Goods Orders Nondef Ex Air, prior 0.4%; Cap Goods Ship Nondef Ex Air, prior 1.0%
• 7:30am: Fed’s Brainard Speaks on Economic Outlook and Monetary Policy
• 12:30pm: Fed’s Kashkari Speaks at University of Minnesota
• 1:10pm: Fed’s Kashkari Holds Townhall Event in Minneapolis
• 7pm: Fed’s Kaplan Speaks in Dallas

DB's Jim Reid concludes the overnight wrap

North Korea aside it was a slightly slow start to the week yesterday with the US out. In fact, when you see headlines about socialite Paris Hilton being the latest celeb to buy into crypto currencies then you know it’s been a quiet day.

Away from the simple life, despite some acknowledgement that Sunday’s nuclear test by North Korea represented an escalation in terms of magnitude and show of force, the biggest reaction certainly for equities at least came at the open, before markets settled down into a bit of holding pattern for the rest of the session which is a consistent theme that we’ve seen after North Korea tensions flare up. After we went to print yesterday the news out of South Korea’s intelligence agency suggesting that North Korea might be in the process of preparing another intercontinental ballistic missile launch certainly turned a few heads though. Later on in the day we also heard from the US ambassador to the UN, Nikki Haley, who didn’t hold back by saying that Kim Jong-Un is “begging for war” and that “only the strongest sanctions will enable us to resolve this problem through diplomacy”. Haley also indicated that the US will now circle a draft of new sanctions which she has proposed a vote on in the UN Council on September 11th.

Since then, late last night the White House released a statement saying that President Trump and South Korea President Moon “agreed to maximise pressure on North Korea using all means at their disposal”. Trump has also agreed for South Korea to buy “many billions of dollars’ worth of military equipment and weapons from the US”.

In terms of the market reaction, the Stoxx 600 closed -0.52%, with only the energy sector finishing firmer. Across the region, the DAX fell -0.33%, FTSE 100 -0.36% and CAC -0.38%. At the other end of the risk spectrum, Gold (+0.66%) rose as high as $1,339.8/oz intraday which was the highest since September 2016, while the Yen and Swiss Franc ended the day +0.51% and +0.70% respectively. Bond markets were a smidgen firmer although again the moves were fairly modest all things considered. 10y Bunds ended 1bp lower at 0.362%, Gilts were broadly flat, but Italian BTPs and Spanish yields fell 3.6bps and 5.0bps respectively.

This morning in Asia, markets are a bit more mixed with the Kospi (-0.27%), ASX 200 (-0.20%) and Nikkei (-0.67%) in the red but the Hang Seng (+0.23%) and Shanghai Comp (+0.20%) a smidgen higher. 10y Treasury yields have opened the week down over 3bps while US equity futures are about -0.32% lower. The remaining PMIs released in China this morning were broadly positive, with the services PMI at 52.7 in August (vs. 51.5 previously) and the composite PMI at 52.4 (vs. 51.9 previously). Elsewhere, the Nikkei Japan services PMI was a tad softer than last month at 51.6 (vs. 52.0 previously).

So with the US back from Labour Day it also means that Congress returns from the August recess and with that, the debt ceiling debate will come back to the forefront. As we said yesterday, Treasury Secretary Steven Mnuchin noted that funding relief for Tropical Storm Harvey could be tied into lifting the debt ceiling which in theory would then lower the risks around a shutdown but at the same time this also shortens the timeline to reach an agreement. However, according to a House Republican aide overnight, the House of Representatives is expected to vote on Wednesday on a Hurricane Harvey relief bill that “will not”combine the bill with legislations seeking to raise the US debt ceiling. Elsewhere, theRepublican Study Committee Caucus Chairman Walker said that “the debt ceiling should be paired with significant fiscal and structural reforms”. So we will have to wait and see. Notably, October bills are still telling a different story compared to the rest of the market so it’ll be interesting to see if there is much price action today in that part of the curve.

Moving on. While there wasn’t much economic data released yesterday, we did get the latest weekly ECB CSPP holdings data. As of September 1st the ECB held €107.3bn which implies net purchases settled last week of €1.1bn. That marks an average daily run rate last week of €268m which compares to the €347m since the program started. The more interesting stat however was that the latest CSPP/PSPP ratio was 10.9% in the month of August which compares to 10.8%, 13.6%, 14.7% and 12.5% in previous months. So this shows that throughout Q2, CSPP was trimmed more than PSPP relative to pre-April flows. This could be explained by the relative liquidity drop in corporates versus govies which means the September data is well worth keeping an eye on.

Turning to the limited economic data yesterday, in the UK the construction PMI for August was slightly lower than expected at 51.1 (vs. 52.0 expected), while the Sentix investor confidence index was above market at 28.2 (vs. 27.0 expected) and up from 27.7 the month prior, meaning it has now returned to just below the cycle high. Elsewhere, the Eurozone PPI for July was slightly below expectations at 0.0% mom (vs. 0.1% expected) and 2.0% yoy (vs. 2.1% expected).

Before we look at the day ahead, we thought it was interesting to note that Norway’s sovereign wealth fund is proposing that its $333bn bond fund should shift away from its multi-currency benchmark index to one which only includes the Euro, Sterling and Dollar, and thus removing other G10 currencies like the Yen, Aussie Dollar as well as EM currencies, although systematic strategies should be put in place to invest in these. The justification is that “in the long term, the gains from broad international diversification are considerable for equities but moderate for bonds” and that “for an investor with 70% of his investments in an internationally diversified equity portfolio, there is little reduction in risk by also diversifying his bond investments across a large number of currencies”. Further, it notes the Japanese bond market is large but “far less liquid than those” other three currencies. The proposal will need to be approved by the government.

Looking at the day ahead, this morning the UK and Italy’s service and composite PMIs for August are due. Then there are final readings for the service and composite PMIs for the Eurozone, Germany and France. Elsewhere, the Eurozone’s retail sales and final readings for 2Q GDP are also due. Across the pond, factory orders for July and final readings for durable and capital goods orders will be released. Onto other events, the US congress returns from the August recess and Fed Governor Brainard, Minneapolis Fed President Kashkari and Dallas Fed President Kaplan will speak at separate functions.