World stocks hit new record highs on Tuesday amid a continuation of Monday's risk-on theme which unleashed a dramatic relief rally on easing North Korea tensions and signs that Hurricane Irma caused less damage than feared (which according to Keynesians should be GDP negative). The MSCI All-Country World Index gained 0.2%, hitting the highest on record with a fifth consecutive advance.

European equities headed for the longest winning streak in five months while S&P 500 futures extended on Monday's record high, pointing to another all time high open. Meanwhile, the dollar struggled to build on a strong start to the week as concerns about lackluster inflation lingered before key U.S. data.

Europe's Stoxx 600 Index gained for a fifth day, the longest run since April, up 0.6% hitting the highest level in 5 weeks, as the technology sector joined in the rally ahead of Apple iPhone unveiling later on Tuesday. Chip makers STMicroelectronics N.V. and Infineon Technologies AG were among big gainers, while the insurer index gained a further 0.3%, as insured property losses from Hurricane Irma’s are expected to be smaller than initially forecast.

S&P index futures also rose as North Korea stayed silent - for now - in the face of another round of sanctions. As Bloomberg puts it well, "the appetite for riskier assets that took hold on Monday was sustained more by a lack of bad news than any positive catalysts."  So far there have been no further provocative developments from North Korea after the UN Security Council approved a watered-down proposal to punish the nation for its latest missile and nuclear tests. Meanwhile, Hurricane Irma damage estimates were revised sharply lower (remember when the worse the hurricane, the better for GDP? Apparently for stocks, no matter what the hurricane outcome, it's all good). With a flat greenback, bonds across Europe followed Treasuries lower.

“The absence of walking into any North Korea-related headlines, the general feeling that the worst-case scenario from Hurricane Irma was avoided and with the more significant economic data reserved for later in the week too, markets seem to have breathed a collective big sigh of relief,” strategists including Craig Nicol at Deutsche Bank AG wrote in a note to clients.

In overnight geopolitical developments, Japan's Defense Minister Onodera said Japan cannot rule out possibility of further provocation by North Korea and will stay on alert. Shortly prior, the UN Security Council unanimously voted to increase sanctions against North Korea, albeit substantially watered down from the original version proposed by the US and excluding an oil embargo or asset freezes of the government. The US Ambassador to the UN Haley said the US is willing to act alone to stop North Korea’s nuclear programme and that half-measures have not worked. There were also comments from South Korea which later stated that North Korea is technically ready for a nuclear test.

British consumer price inflation came in stronger than expected at 2.9 percent, offering more clues as to the Bank of England’s policy decision on Thursday, and sending the pound to the highest level against the USD, as cable rose as high as 1.328. The BOE has been struggling to keep inflation at 2 percent since Sterling tumbled in response to Britain voting to leave the European Union in June 2016, pressuring on consumer spending and living standards (more below).

Asia, too, was green across the board: Japan’s Topix index advanced 0.9 percent at the close in Tokyo. Australia’s S&P/ASX 200 Index added 0.6 percent. South Korea’s Kospi index rose 0.3 percent. The Hang Seng Index in Hong Kong and gauges in China fluctuated. The MSCI Asia Pacific Index climbed 0.4 percent. The Japanese yen fell 0.3 percent to 109.74 per dollar, the weakest in more than a week.

The dollar failed to maintain momentum after Monday’s 0.6 percent gain, with market focus turning to whether U.S. consumer-price data due Thursday has the potential to improve the greenback’s allure. The Bloomberg Dollar Spot Index swung between gains and losses as investors unwound risk-off positions, while the pound rallied on the back of faster-than-estimated U.K. inflation. Sterling rose to $1.3282, its highest level in a year, as data showed annual core inflation in Britain accelerated to 2.7 percent in August, the most since 2011. Profit-taking in euro-pound longs also helped cable push above the August highs, according to currency traders in Europe and London.

The strong U.K. data spurred an immediate repricing of Bank of England rate-increase odds. Based on MPC-dated overnight index swap rates, chances of a 25 basis point hike by the end of year have risen to 33 percent from 24 percent Monday. A tightening is fully priced in by end of summer next year. Risks are now skewed toward a hawkish shift in the BOE Monetary Policy Committee vote on Thursday, with more than two members now pushing for a rate increase, providing more support for the pound.

Over in China, the onshore yuan slumps by the most in six months against a trade-weighted currency basket amid a weaker central bank fixing and a dollar surge overnight. The Bloomberg replica of the CFETS RMB Index slumped 0.44%, the biggest drop since March 16, to 94.9385, just two days after reaching this year’s high on Monday. On Tuesday, the PBOC weakened its daily reference rate by 0.43%, the most since Jan. 9 and the first cut in 12 days, to 6.5277 per dollar. The fixing was weaker than the 6.5245 average of estimates from 18 traders and analysts surveyed by Bloomberg, and followed on Friday's aggressive attempt by the PBOC to reignite volatility by invitine shorters into the currency after it cut reserve requirements from 20% to 0%.

Brent traded near $53.50/bbl; Bloomberg reports that OPEC output fell in August. OPEC’s estimate of its oil production, compiled from four of six external data sets known as secondary sources, fell to 30.004m b/d excluding output from Libya and Nigeria, according to a person familiar with the matter; down from 30.113m b/d in July. At the same time, Saudi Arabia reportedly told OPEC it pumped 9.95m b/d of oil in August, down from 10.01m b/d in July. The data contrast with OPEC’s internal ests, which show Saudi Arabia pumped 10.022m b/d in August vs 10.049m b/d in July, according to information compiled from four of six secondary sources.

“The OPEC monthly report is coming out later and that should set some kind of direction to the market,” says Tamas Varga, analyst at PVM Oil Associates. “Yesterday we saw the WTI-Brent arbitrage strengthening, it has been so weak that it’s inevitable that at some point people are going to find U.S. crude so cheap that it will reverse”

Elsewhere, safe-haven assets such as U.S. Treasuries and gold gave back most of recent gains. The 10Y Treasury yield jumped to 2.1515% from 2.1250%, the highest in a week. Germany’s 10-year yield gained three basis points to 0.37 percent, the highest in a week. Britain’s 10-year yield rose three basis points to 1.076 percent, the highest in almost three weeks. Gold dropped to $1,326.31 per ounce, compared to Friday’s one-year peak of $1,357.4.

Key events on today's calendar include the JOLTS job openings, NFIB small business optimism report, U.S. 10-year auction.

Bulletin Headline Summary from RanSquawk:

• GBP rallies, as CPI & RPI beats put focus on the MPC
• In politics, UK Parliament passed the Brexit Bill and Norway’s ruling centre-right government won re-election
• Looking ahead, highlights include potential comments from ECB’s Constancio and a US 10yr Auction

Market Snapshot

• S&P 500 futures up 0.1% to 2,490.75
• STOXX Europe 600 up 0.5% to 381.49
• MSCI Asia up 0.3% to 162.84
• MSCI Asia ex Japan up 0.4% to 538.95
• Nikkei up 1.2% to 19,776.62
• Topix up 0.9% to 1,627.45
• Hang Seng Index up 0.06% to 27,972.24
• Shanghai Composite up 0.09% to 3,379.49
• Sensex up 0.6% to 32,080.00
• Australia S&P/ASX 200 up 0.6% to 5,746.44
• Kospi up 0.3% to 2,365.47
• German 10Y yield rose 2.6 bps to 0.362%
• Euro up 0.04% to $1.1958
• Italian 10Y yield rose 0.9 bps to 1.677%
• Spanish 10Y yield rose 2.7 bps to 1.593%
• Brent Futures down 0.5% to $53.57/bbl
• Gold spot down 0.09% to $1,326.28
• U.S. Dollar Index unchanged at 91.88

Top Overnight News

• President Donald Trump plans an aggressive travel schedule, taking him to as many as 13 states over the next seven weeks, to sell the idea of a tax overhaul as the administration tries to avoid repeating the communication failures of its attempt to repeal Obamacare
• Florida’s ports re-open after Irma, but feeding gas stations could take days and restoring power also is a challenge in getting gas to consumers
• Investors may pile into Treasuries and gilts at the expense of Japanese and Chinese debt if a proposal by the world’s biggest wealth fund is implemented
• Hedge funds are less interested in shorting China after being wrong in predicting a sharp devaluation, a credit crisis and an economic hard landing
• UN Votes New North Korea Sanctions Short of an Oil Embargo
• Toshiba Board Is Said to Aim for Chip Sale Decision Wednesday
• Equifax’s Seismic Breach Tests Trump Pledge to Dismantle Rules
• CBOE Plans to Introduce Options on S&P Select Sector Indexes
• U.K. Inflation Accelerates More Than Forecast to Reach 2.9%
• $150 Billion Misfire: How Forecasters Got Irma Damage So Wrong
• In Dismal Summer, ‘Despicable Me 3’ Producer Delivers $1 Billion
• SoFi CEO Cagney to Step Down by Year End; Co. Seeks Successor
• FPL Says Much of SW Florida Electric System Will Need Rebuild
• Delta Says 1,100 Flights Canceled at Atlanta on Irma Effects
• U.K. Will Offer Troops to Support EU Operations After Brexit
• Li Upbeat on China Economy as Lagarde Cites Push to Curb Risk

Asian markets traded mostly higher on positive momentum from the reduced North Korean concerns, which also followed a strong performance on Wall St where the S&P 500 closed at a fresh record level. ASX 200 (+0.7%) and Nikkei 225 (+1.2%) gained as financials mirrored the outperformance in their counterparts stateside where lower estimates of hurricane damages and rising yields buoyed the sector, while JPY weakness remained the driver for Japanese exporter sentiment. Conversely, Shanghai Comp. (+0.1%) and Hang Seng (Unch.) were less exuberant after the PBoC refrained from liquidity operations again and after the Hong Kong benchmark index met resistance around the 28,000 level. Finally, 10yr JGBs were lower as 10yr yields rose by the most YTD alongside increases in global yields, with demand for bonds also dampened by the positive risk tone and after a 5yr auction where the b/c declined and tail in price widened from prior. PBoC refrained from open market operations again today.
PBoC set CNY mid-point at 6.5277 vs Prev. 6.4997, biggest fixing drop since January. Chinese Premier Li says China's economy will continue maintain trend seen in H1, adds China will not boost exports through CNY depreciation.

Top Asian News

• Hong Kong Finance Chief Warns Again of Property Risk as Fed Acts
• Star Stock Geely Soars Most in Month on Market Sentiment Boost
• China’s Banks Are Leading Globalization Charge, McKinsey Says
• Hedge Funds Used to Love Shorting China. Now, Not So Much

European equity markets also traded in the green across the board with Stoxx 600 sectors following the theme, as financials lead the way. UK home builders have struggled, however, and underperform, likely weighed on after a report in the Times suggested that the chronic housing shortage is being made worse by the reluctance of banks to lend to small housebuilders, the Federation of Master Builders has claimed. Bunds underperform, leading the middle of the curve, as investors unwind safe haven flows. The Bund now trades around 162.40, with the next support to look-out for being 162.22. Gilts do trade slightly better than Bunds, however, the Gilt bears did catch up following the beats in UK CPI and RPI data. Gilts now trade through September lows, with the BoE possibly looking at a hawkish tilt on Thursday.

Top European News

• Norway PM Wins Second Term as Insurgency Against Oil Fizzles
• Swedbank Plans Two-Tiered FICC Research Offering After MiFID II
• Italian Quarterly Unemployment Rate Falls to Lowest Since 2012
• U.K. Builders Fall; BofAML Sees Multiple Risks, Full Valuations

In currencies, morning FX volatility has largely been based on data: the UK beat across the board, with EUR/GBP now hitting one-month lows, as the inflation figures could lead the BoE to be more forceful in realigning market forecasts with their own when it comes to rate hike expectations. The stronger data, supported by some form of Brexit direction clarity, has helped sterling find a bid through the European morning. Elsewhere, only a slight miss from Sweden helped some SEK bulls, with many pricing in a bad report, following Norway’s misses yesterday and inflation also remaining above the Riksbank's target. EUR/SEK fell from 9.5820, to print lows around 9.5440. Political news also caused some early volatility; as the latest Newshub poll showed a lead for the National Party vs. Labour in New Zealand, the details of the poll have the Greens now under the 5% threshold required to enter Parliament without the security of an electoral seat win. The lack of power from the Greens will lead to Labour not being able to form a coalition, leaving the national party with a 61 seat majority.

In commodities, WTI and Brent saw some bearish pressure, as bulls failed to test yesterday’s high. Fundamentally, US refineries are restarting following the shutdowns caused by Hurricane Harvey, however, with restarts historically dangerous, operators did keep the shutdowns to a minimum. Precious metals continue to highlight metal markets, as the risk tone has picked up this week, they fail to fill Monday’s gap could be an indication of a strong bearish trend in Gold, which trades back within August’s range. OPEC figures show that the cartel's August output has fallen to 30mln bpd, according to sources.

On today's calendar, there is the NFIB small business confidence reading and July JOLTS job openings. Away from the data, China Premier Li Keqiang will host an economic roundtable in Beijing that will include heads of IMF, the World Bank, and WTO.

US Event Calendar

• 6am: NFIB Small Business Optimism, 105.30, est. 104.8, prior 105.2
• 10am: JOLTS Job Openings, est. 6,000, prior 6,163

DB's Jim Reid concludes the overnight wrap

Yesterday felt a bit like a no-news-is-good-news-day for markets. Indeed, the absence of walking into any North Korea related headlines was part of the story, while the general feeling that the worst-case scenario from Hurricane Irma was avoided also played a big role. With the more significant economic data reserved for later in the week too, markets seem to have breathed a collective big sigh of relief with the S&P 500 (+1.08%) rallying to another all-time high after rising by the most in a single session since April. The Dow (+1.19%) and Nasdaq (+1.13%) are just off their respective record levels, while prior to this in Europe the Stoxx 600 had closed +1.04% for its best day since mid-August.

Meanwhile, after flirting with a 1% handle last week, 10y Treasury yields jumped +8.0bps yesterday to close at 2.131% and finish what was the weakest session since late July. The stronger than expected China inflation data probably impacted at the margin too but as we said yesterday it feels like the bigger test for rates will come this Thursday with the August CPI report. Meanwhile, bond markets in Europe finished anywhere from +1bp to +6bps higher in yield, with interestingly Italy outperforming although it wasn’t obvious what was driving that. Elsewhere, in further evidence of a classic risk-on session, two of the bigger underperforming currencies were the Swiss Franc (-1.27%) and Yen (-1.42%), while Gold also tumbled -1.41%. WTI Oil rose +1.24% as OPEC members voiced support for a possible extension of production cuts.

Just after the close of the US session last night, the UN Security Council voted unanimously for a watered down version of sanctions on North Korea, which does not include an oil embargo. The resolution passed seeks to cut imports of refined petroleum products to 2 million barrels per annum and ban textile exports, but does not include the more stringent oil embargo, likely reflecting the lack of support from China and Russia. We are yet to have heard a response from North Korea post the decision. One would have to imagine that the outcome helps near-term sentiment insofar as not antagonizing China, but the reality is that it still doesn’t come close to solving much.

This morning in Asia, markets have largely followed the lead from the US and are trading broadly higher as we go to print, with the Nikkei (+1.01%), ASX 200 (+0.87%), Kospi (+0.12%) and Shanghai Comp (+0.07%) firmer. The Hang Seng is currently flat. US equity futures are also little changed while bond markets in Asia are weaker.

Staying in Asia, yesterday our China Chief Economist Zhiwei Zhang published a report previewing the 19th National Congress meeting from October 18th. Zhiwei notes that this week-long event kicks off a six-month process that continues with the Central Economic Working Conference (CEWC) in December and the National People’s Congress (NPC) in March next year. He notes that the event is more about politics than setting economic policies, as the representatives will elect a group of leaders. Based on the age rule, five of seven incumbent members of the Politburo should retire as they are older than 67. Other important things to look out for include the CEWC setting GDP growth targets, while finally, the NPC will see a reshuffle of cabinet ministers and government posts. Overall, Zhiwei expects no substantial change in policy over the next six months, although the central government may slow fiscal spending a bit and the focus will turn to whether China may push for more deleveraging and structural reforms.

Moving on. Following on from China’s better than expected inflation report the early focus in Europe yesterday was on the mixed August CPI reports out of Norway and Denmark. Norway disappointed with underlying CPI falling a fair bit more than expected (-0.9% mom vs. -0.4% expected) however Denmark then bettered expectations after coming in at -0.3% mom versus expectations for a bigger -0.5% decline. As a reminder, today we’ve got a bunch more inflation reports including Sweden first thing this morning, followed by the UK and then Portugal.

Staying in Europe, there was a steady slate of comments from ECB board members yesterday. The early comments came from Benoit Coeure. Initially, the headlines appeared fairly negative, warning that persistent gains in the euro may weigh on inflation, however, the details of his comments revealed Coeure highlighting that the pass-through impact of the currency appreciation has declined as a result of a stronger economy and therefore any future impact is more limited on inflation. Later on, the ECB’s Ardo Hansson highlighted that “inflation rates have been gradually increasing” while fellow board member Sabine Lautenschlaeger said that “conditions are in place for inflation to pick up and move steadily towards our goal”.

Elsewhere at the ECB, it was interesting to note the El Mundo report yesterday suggesting that the German government wants Bundesbank President Jens Weidmann to replace ECB President Mario Draghi when he steps down in October 2019. The article also suggested that a representative from Southern Europe as Vice-President would be nominated to keep the balance (Spain’s Economy Minister being highlighted). Weidmann has held relatively extreme and vocal views on ECB policy so it’s hard to know if this would improve his case across the wider Eurozone. Anyhow, this is still reasonably far off for now with a decision not due to be made until June 2019.

Moving onto the latest on Brexit. Following a vote early this morning, PM May’s repeal bill secured enough votes (326-290) in the House of Commons to pass the first hurdle which would allow the UK government to copy EU law onto the domestic statute book. However, the real challenge will be how many amendments are made over the next eight days as Parliament debate the bill further. One such debate includes allowing ministers to make changes to existing laws, but bypass the normal scrutiny by Parliament.

Before we take a look at today’s calendar, in terms of the remaining data yesterday, in Italy July industrial production was above market at +0.1% mom (vs. -0.4% expected). This, coupled with solid gains in the preceding two months, has led to annual growth of +4.4% yoy (vs. +3.7% expected). In France, the business industry sentiment index was slightly lower than expectations at 104 (vs. 106 expected), but remains consistent with annual GDP growth of c.2% yoy. There was no data released in the US yesterday.

Looking at the day ahead, in the UK, we have August CPI (+0.5% mom expected), PPI (+0.1% mom expected) and RPI (+0.5% mom expected). Across Europe, France’s 2Q total payrolls and Italy’s 2Q unemployment rate are also due. Over in the US, there is the NFIB small business confidence reading and July JOLTS job openings. Away from the data, China Premier Li Keqiang will host an economic roundtable in Beijing that will include heads of IMF, the World Bank, and WTO.