And we're back at all time highs.

With traders paring back risk positions on Friday ahead of a weekend full of potential risk events, Monday has seen a global "risk-on" session in which global stocks rose back to record highs and US futures jumped, the dollar gained, Treasuries retreated, while VIX and dollar slumped as appetite for risk returned to global markets after North Korean failed to conduct an anticipated missile test failed to materialize and Hurricane Irma appears to have struck the U.S. with less force than feared. The MSCI All-Country World Index increased 0.3% to the highest on record with the largest climb in more than a week, while that "other" trade also outperformed, as the MSCI Emerging Market Index increased 0.4% to the highest in about three years. Safe havens such as the yen and Swiss franc all also fell.

Amid the risk-on tone, the dollar registered its biggest gains in the currency markets in ten days. It added 0.5 percent against its perceived safe-haven Japanese counterpart the yen JPY and clawed back ground against the high-flying euro as an ECB policymaker flagged caution about the single currency’s recent rise. 

“The good news was that the eye of Hurricane Irma took a path west of Miami and has since weakened to a Category 1 storm so that damage in Florida – whilst still severe... appears not to be quite as catastrophic as had been feared last week,” said Daiwa Capital Markets strategist Chris Scicluna. “And thankfully there was no bad weekend news out of North Korea either.”

As Bloomberg summarizes the post-weekend action, it was marked by the unwind of risk-off related hedges after the impact of Hurricane Irma is smaller than initially feared and North Korea does not conduct any military activity over the weekend. JPY and CHF consequently underperform; Yuan continues to weaken after PBOC removed reserve requirement on FX forwards. DXY retraces overnight rally to trade flat, EMFX rallies against USD. European equity markets rally strongly from the open, insurance sector leads relief rally followed by financial services. Bund and UST curves both bear steepen, 10Y futures gap lower and stay within a tight range, similar move in spot gold. Industrial metals rally after China inflation data; Brent-WTI spread tightens after Friday’s sharp widening move.

Gold sank 0.7 percent to $1,337.62 an ounce, the biggest dip in almost four weeks, although it still remains at notably elevated levels as shown below.

The Stoxx Europe 600 Index jumped the most in more than a week, rising for the fourth day, as all the region’s major stock gauges advanced and almost every sector gained. Earlier, equities across Asia traded in the green. Oil advanced as Gulf Coast refining capacity continued to recover after getting hit by Harvey. Stoxx 600 up 0.95% to 379.08, with insurers leading gains after three straight weeks of declines, amid relief that any impact from storm damages in the U.S. may be less than anticipated.

In Asia, the MSCI Asia-Pacific Index jumped 0.6 percent to hit the highest since December 2007. The Topix index advanced 1.2 percent at the close in Tokyo, its steepest advance since early June. Japan’s Nikkei rose 1.4 percent after Pyongyang held a massive celebration to congratulate the nuclear scientists and technicians who steered the country’s sixth and largest nuclear test a week earlier. South Korea’s Kospi index rose 0.7 percent as did the S&P/ASX 200 Index in Sydney. Hong Kong’s Hang Seng Index rose 1 percent, while gauges in China fluctuated. The Japanese yen sank 0.6 percent to 108.44 per dollar, the biggest dip in almost four weeks.

“It’s too early to say the (North Korean) risks are gone, but one thing for sure is that market players now think the situation won’t get worse as it did some weeks ago,” said Lee Kyung-min, a stock analyst at Daishin Securities in Seoul. Lee said many foreign investors and domestic institutions were purchasing South Korean tech and chemicals shares as quarterly earning season neared.

Continuing Friday's action, the onshore yuan headed for its biggest decline in 8 months, with sentiment taking a hit after China’s central bank removed trading curbs on foreign-exchange forwards.

“The removal potentially makes it easier for traders to purchase the USD, easing the pressure for yuan appreciation,” said analysts at ANZ in a note. “The change likely signals some discomfort about the stronger yuan and its impact on Chinese exports.”

As a result, the CNY weakened 0.55% to 6.5246 per dollar, set for the biggest drop since January on a closing basis. The PBOC strengthenedthedaily reference rate for 11th day, longest run since 2005; sets it 0.05% stronger at 6.4997 per dollar, however, this was weaker than the 6.4834 average forecasts from a survey of 16 traders and analysts. In offshore markets, the CNH dropped 0.51% to 6.5290 per dollar in Hong Kong. Perhaps in an attempt to limit losses, the central bank once again intervened by boosting margin costs, and the overnight CNH Hibor rose 78 basis points, the most since June 1, to 2.29433%. One- month CNH borrowing cost climbs 50 basis points to 3.60633%.

Also in China, August inflation readings were above market on Saturday and confirmed the rise in pricing pressure seen in the PMI data earlier in the week. The CPI rose +0.4% mom, lifting annual growth to +1.8% yoy (vs. +1.6% expected), which is the fastest pace since January. This partly reflects a smaller deflationary contribution from the food sector (prices now down just -0.2% yoy). However, non-food inflation picked up three-tenths to +2.3% yoy. Elsewhere, a +0.9% mom rise in August PPI saw through-year inflation measured at the producer level rise to +6.3% yoy (vs. +5.7% expected).

There were also reports Beijing was planning to shut down local crypto-currency exchanges, dealing a blow to bitcoin’s recent stellar rally. Bitcoin was quoted at $4,300 BTC=BTSP on the BitStamp platform, off a recent record high of nearly $5,000.

In commodity markets, gold softened 0.7 percent to $1,337.81 an ounce, away from a one-year peak of $1,357.54. Oil prices regained a little ground after the Saudi oil minister discussed the possible extension of a pact to cut global oil supplies beyond March 2018 with his Venezuelan and Kazakh counterparts. The news of the talks on Sunday helped offset the downward pressure on oil prices amid worries that energy demand would be hit hard by Hurricane Irma.

In rates, the yield on 10-year Treasuries gained three basis points to 2.09 percent. Germany’s 10-year yield climbed one basis point to 0.33 percent. Britain’s 10-year yield increased three basis points to 1.018 percent.

Market Snapshot

• S&P 500 futures up 0.5% to 2,475.25
• STOXX Europe 600 up 0.9% to 379.08
• MSCI Asia up 0.5% to 162.41
• MSCI Asia ex Japan up 0.5% to 536.22
• Nikkei up 1.4% to 19,545.77
• Topix up 1.2% to 1,612.26
• Hang Seng Index up 1% to 27,955.13
• Shanghai Composite up 0.3% to 3,376.42
• Sensex up 0.8% to 31,924.11
• Australia S&P/ASX 200 up 0.7% to 5,713.15
• Kospi up 0.7% to 2,359.08
• German 10Y yield rose 2.2 bps to 0.334%
• Euro down 0.1% to $1.2022
• Brent Futures down 0.5% to $53.52/bbl
• Italian 10Y yield rose 3.4 bps to 1.668%
• Spanish 10Y yield fell 0.2 bps to 1.542%
• Gold spot down 0.7% to $1,336.69
• U.S. Dollar Index up 0.1% to 91.46

Bulletin Headline summary from RanSquawk:

• Risk-on theme as North Korea refrains from missile tests, insurers outperform on lower damage estimates from hurricane
• ECB’s Coeure and Mersch speak; both mention subdued inflation pressures
• Looking ahead, highlights include UN vote on North Korean sanctions, UK vote on Brexit Bill, US 3y note auction

Top Overnight News

• Irma Weakens After Pummeling Miami, Reducing Damage Forecast
  • Irma Cuts Power to 4.5 Million, Shuts Ports and Imperils Crops
  • Delta Eyes Limited Florida Service, Atlanta Hub Cancellations
  • Europe’s Reinsurers Jump as Florida Avoids Worst From Irma
• ECB’s Coeure: monetary policy never acts in isolation on the exchange rate and in periods of recovery the positive confidence and stimulus effects of monetary policy are likely to offset, at least in part, the disinflationary effects of a stronger currency coming from expectations of tighter policy
• El Mundo: German govt wants Weidmann to be next ECB President; current Spanish Economy Minister De Guindos well placed to be new Vice President
• Austria: EUR 100y bond mandated for syndication, dependent on investor feedback
• NHC: Irma continuing to weaken; hurricane warning changed to tropical storm warning
• China Aug. CPI y/y: 1.8% vs 1.6% est; PPI 6.3% vs 5.7% est.
• North Korean Sanctions: U.S-drafted resolution for UN Security Council drops proposed oil embargo which was opposed by China and Russia, according to people familiar: Reuters
• Trump Debt Limit Deal Undermines Trust Among GOP on Tax Overhaul
• Teva Picks Lundbeck’s Schultz to Revive Israeli Drugmaker
• North Korea Warns U.S. of ‘Greatest Pain’ if Sanctions Pass
• Boeing to Design, Build Medium Earth Orbit Satellites for SES
• Pilgrim’s Pride Is Said to Near Deal for U.K. Producer Moy Park
• Blackstone Is Said to Bid for Americold, New York Post Says

Asia bourses began the week on the front-foot amid a relief rally after North Korea refrained from firing a missile over the weekend and instead launched a tirade of threats towards the US. Although there were widespread expectations for a possible missile test to commemorate its Founding Day, North Korea abstained from any action which underpinned both ASX 200 (+0.8%) and Nikkei 225 (+1.4%), with exporters in the latter further underpinned by JPY weakness. Chinese markets ignored the PBoC's continued skip of open market operations, as Hang Seng (+1.0%) and Shanghai Comp. (+0.1%) conformed to the positive risksentiment which was also supported higher than expected China CPI and PPI data that suggested stronger economic activity. 10yr JGBs were lower with demand weighed amid the positive risk tone across the region and a lack of Rinban announcement by the BoJ. PBoC set CNY mid-point at 6.4997 (Prev. 6.5032); 11th consecutive firmer fix which is the longest streak since 2005. PBoC will no longer require financial institutions to set aside funds when purchasing USD onbehalf of clients through forwards.China inflation data printed over the weekend, coming stronger on the back of higher food and commodity prices:

• Chinese CPI (Aug) M/M 0.4% vs. Exp. 0.3% (Prev. 0.1%).
• Chinese CPI (Aug) Y/Y 1.8% vs. Exp. 1.6% (Prev. 1.4%)
• Chinese PPI (Aug) Y/Y 6.3% vs. Exp. 5.7% (Prev. 5.5%)

Top Asian News

• Hedge Fund Bridgewater Is Said to Consider China Onshore Fund
• China Latest Bond Default Is a Cautionary Tale for Investors
• IndusInd Is Said to Discuss $2.2 Billion Bharat Financial Deal
• China Thinks the U.S. Holds Key to Solve North Korea Crisis
• Blackstone to Buy Stake in India’s Distressed Assets Firm: Mint
• China May Unveil Car Emissions Rules This Week, Association Says
• Bank Indonesia Sees Rupiah at 13,420/USD by Year-End: Kontan
• China’s Three-Year Focus on Preventing Yuan Slump Is Over: HSBC

In European markets, risk on tone has also dictated early trade, as geopolitical concerns were slowed, with North Korea refraining from conducting any missile tests over the weekend. European bourses trade in the green across the board – financials lead the all green charge, buoyed by insurance names, as concerns of Hurricane Irma’s damage have softened, with the estimate damage reduced by USD 49bln, from USD 200bln to USD 151bln, according to Enki Research. A gap lower was observed in the Eurex open, with both the Bund and now Gilts trading around session lows. Limited volatility has been witnessed however, with subdued trade evident, as many are likely to await a slew of CPI data this week, joined by the latest BoE interest rate decision on Thursday. Outperformance has been seen in the longer term BTP, helped by slight relief at the Tesoro’s opting to tap the 10/36 instead of the new 3/48. 30y BTPs are 5bps tighter to Bunds, and near 2bps tighter to Bonos, as they lead the eurozone market. Elsewhere, a rare Monday US note auction is due later, with USD 24bln 3y notes set to be auctioned on a week that sees 3s, 10s and 30s.

Top European News

• Italy Production Unexpectedly Rises In Sign of Faster Recovery
• London to Remain Center of Europe Private Equity, Huth Tells HB
• May Senses Victory on Brexit Bill That Faces Tougher Times
• Goldman Sachs to Expand Retail Banking Business to U.K., FT Says
• Astra Doubles Down on Cancer Research Despite Key Trial Setback
• Brookfield May Be Sole Bidder for Arqiva Auction: Sunday Times
• Nordea’s ECB Move Unlikely to Boost Dividends on Capital Relief
• Lundbeck CEO Shock Resignation a Large Negative: Credit Suisse

In commodities, comments from ECB’s Coeure were initially ignored by the market, however, as his speech was digested, some jumped on his
comments stating that the policy-relevant horizon - The "Medium Term" concept in our monetary policy strategy - is likely to be longer given the persistence of subdued inflationary pressures. The marginal dovish swing, did see a brief break through 1.20, however, normal theme has resumed in EUR/USD, breaking back inside Friday’s trading range. The JPY is weaker amid the risk-on sentiment following the lack of any missile test from North Korea with USD/JPY holding firm above 108.50. Early volatility was witnessed in the NOK, as Norway’s CPI and Core Inflation figures missed across the board. EUR/NOK shot through September’s high, as buyers continue to control the pair following the strong support seen around the 9.22 area. Today’s
election in Norway could also gain some attention with polls to close to call, although results are not expected until the early hours of Tuesday morning.

In currencies, WTI and Brent crude futures do trade off highs in recent trade, despite comments over the weekend from Saudi’s Falih, stating that
discussions have begun with Venezuela and Kazakhstan on the possibility of extensions on the global oil supply cut beyond 2018. Precious metals have suffered throughout Asian and early European trade, a result of the increased risk tone and the lack of North Korean action over the weekend.

US Event Calendar

• Nothing major scheduled

DB's Jim Reid concludes the overnight wrap

It’s been a busy couple of weeks since markets fully emerged from the summer lull but this week should see a renewed focus on the data as we’ve got a busy week ahead for global CPI reports which should test the inflation pulse once again. The highlight will likely be this Thursday when we receive the US CPI report for August but in the meantime we’ve got CPI due in Norway and Denmark this morning, Sweden and the UK tomorrow, Germany (final) and Spain on Wednesday along with the final readings for France and Italy on Thursday. PPI in the US on Wednesday is also worth a watch given that the healthcare component is used as an estimator for the same component in the core PCE deflator. Over the weekend we’ve already received a slightly stronger than expected CPI and PPI print in China. More on that shortly.

Of those above, the US CPI report takes on a little bit more focus this week not only for the slightly dampened Fed outlook right now but also because core CPI has disappointed by missing consensus expectations for the last five months. Our US economists and the market have the headline and core readings pegged at +0.3% mom and +0.2% mom respectively. It’s worth noting though that should the core reading finally print in-line, the YoY rate is still likely to slip one-tenth to +1.6% which would put it at the lowest since January 2014. Indeed, our US economists are of the view that the core reading may not bottom out until Q1 2018 before then tracking back towards the Fed’s 2% target.

In markets, it feels like another disappointing report will likely see 10y Treasury yields test below 2% having closed at 2.051% on Friday. After touching at a high of 2.395% back on July 7th yields have fallen 34bps in just over two months and DB’s Dominic Konstam now thinks that the next level is a move lower to 1.8%. Dominic mentioned in his weekly on the weekend that there are three broad themes driving markets currently including geopolitical/politics, the Fed overkill-low inflation equilibrium nexus and an emerging concern for a still small but risingUS recession probability associated with liquidity and balance sheet reduction. The ‘R’ word hasn’t been frequently used of late but Dominic notes that standard recession probability monitors of <10% are understating the odds over the next 12 months. He thinks the number should be closer to 20% given that C&I loan growth is slowing in a fashion typically seen during a recession and core inflation ex-shelter is exceptionally low. One to ponder.

Before we get to all that data, with regards to the weekend news, sadly all the focus is on the shocking impact from Hurricane Irma which struck Florida on Sunday morning. It was categorised as a Category 4 storm as it struck the State having already left a trail of destruction through the Caribbean. Following the largest mass evacuation in US history, the extent of the damage will likely not be known for days and the concern now is about the storm surge which has followed, with early reports suggesting the 3 million people are without power and the lowlying Florida Keys area being devastated. There is some suggestion though that the worst-case scenario has not played out after the Storm shifted west and the worst of it avoided the highly populous city of Miami.

That seems to be helping support a more positive tone in markets this morning. As we type, US equity futures are up +0.49% while across Asia the Nikkei is up +1.38%, Kospi is +0.75%, ASX 200 is +0.79% and Hang Seng is +0.95%. The usual safe havens have weakened on the other hand with the Swiss Franc and Yen down half a percent, Treasury yields up +4bps and Gold -0.64%. Meanwhile after fears were for another possible missile test, it seems that the lack of one by North Korea over the weekend is also helping to support sentiment although there has been some focus on a release by the state-run Korean Central News Agency warning the US of retaliation for tougher UN sanctions. Elsewhere in Asia this morning, the Chinese Yuan was down as much as -0.50% after the PBoC announced that it was removing a reserve requirement on banks trading USD forwards for clients. The details revealed cutting the deposit from 20% to 0%. The move follows a strong recent run for the Yuan, suggesting perhaps that the PBoC was getting a bit uncomfortable at the pace of recent appreciation.

Moving on. In terms of markets on Friday, equity markets finished slightly mixed with the S&P (-0.15%), Stoxx 600 (+0.15%) and FTSE (-0.26%). Core bond yields increased modestly in the US and Europe, with 10y US (+1.0bp), Bunds (+0.6bp) and Gilts (+2.2bp). Peripherals underperformed post the rally on Thursday, with Italian yields up +4.3bps and Portugal (+4.8bp) and Spain (+3.8bp) also weaker. In commodities, WTI Oil fell -3.28%, partly reflecting potential drags from Hurricane Irma, while futures on orange juice rose +5.23%. Base metals such as Zinc and Copper fell -2.27% and -2.63% respectively. Elsewhere, the US Dollarindex dipped -0.34%.

Away from markets, the final Fed speakers before the blackout period were a bit more hawkish than compatriots from earlier in the week. The NY Fed’s William Dudley spoke again on Friday to repeat his message of higher interest rates over time, but added that it was possible that Hurricane Harvey and Irma could impact the timing of the next move. Elsewhere, the Kansas City’s Esther George (who will vote next year), said “we will need to move interest rates to more normal levels”, and “it is time to continue to move that interest rate higher. It is not an attempt to tighten or slow down the economy”. That said, she also reiterated that “the Committee has committed to a very gradual approach (on rates)” and that “I think that is appropriate”.

Closer to home, Reuters reported on Friday that ECB officials discussed options which could include cutting asset purchases to “€40bn or €20bn a month”. The fact that there was some chatter about a possible reduction to as low as €20bn was seen as a bit hawkish. As a reminder, our economists expect an announcement at the October meeting, extending until mid-2018 at the slower rate of €40bn per month.

Before looking at the week ahead, datawise in the US on Friday the final reading for wholesale inventories was slightly above expectations at +0.6% mom (vs. +0.4% expected). Elsewhere, consumer credit for July rose $18.5bln (vs. $15bln expected), which nudges through-year growth up a tenth to +5.9% yoy. Over in Asia, China’s August inflation readings were above market on Saturday and confirmed the rise in pricing pressure seen in the PMI data earlier in the week. The CPI rose +0.4% mom, lifting annual growth to +1.8% yoy (vs. +1.6% expected), which is the fastest pace since January. This partly reflects a smaller deflationary contribution from the food sector (prices now down just -0.2% yoy). However, non-food inflation picked up three-tenths to +2.3% yoy. Elsewhere, a +0.9% mom rise in August PPI saw through-year inflation measured at the producer level rise to +6.3% yoy (vs. +5.7% expected).

Across Europe, there were the July industrial production prints for UK, France and Spain. In the UK, the IP was in line at +0.2% mom. However, July manufacturing production was above market at +0.5% mom (vs. +0.3% expected), lifting annual growth to +1.9% yoy (vs. +1.7% expected), which is the strongest reading in four months. Over in France, IP was broadly in line at +0.5% mom and +3.7% yoy, but manufacturing production was lower than expected at +0.3% mom (vs. +0.6% expected) and +3.9% yoy (vs. 4.2% expected). Spain’s IP fell a disappointing -0.3% mom but is still +1.9% yoy. Elsewhere, the UK’s July trade deficit of £2.9bn was little changed from the previous month and slightly smaller than the market had expected (vs. £3.25bn expected).