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Global Stocks Rebound From N.Korea ICBM Jitters; US Markets Closed For "Amexit Day"

With the US out on holiday for the 4th of July, overnight trading volumes have been muted, as Europe started off in the red but has since trimmed most losses (Stoxx 600 -0.1%) while S&P500 futures rose shaprly from session lows spurred by the European open ignoring the risk-off sentiment from North Korea's latest missile launch, trading 0.2% higher, or up 4 points to 2,429 and closing the gap to Monday's last minute tech-driven market selloff.

For those pressed for time, today's 60-second market wrap comes from Citi, which titles it appropriately enough, "Cause baby you're a firework"

Those celebrating Independence Day today will no doubt have hoped that it wouldn’t have resembled the eponymous movie quite so vividly – Fireworks are to be expected on July 4; Intercontinental Ballistic Missiles are undoubtedly overkill. As London walked in, North Korea was releasing a statement to crow over its most successful missile launch to-date: An ICBM was fired which flew for a record time/altitude for the rogue state. The move is highly provocative and it is difficult to imagine that the date chosen was in any way coincidental (NK did the same in 2006 and 2009). The inevitable risk-off reaction in markets in Asian hours was prompt but limited – the enormity of this latest crisis is, as yet, difficult to gauge.


Along with some small follow-through from the initial risk-off move, today has been dominated by G10 central bank events. Both the RBA and the Riksbank neglected to join the ever-growing ranks of hawkish central banks – hope now rests with the BoC next week (July 12) after an encouragingly hawkish interview with Governor Poloz was published this morning. The BoE’s MPC is quite clearly of two minds at the moment: Vlieghe unsurprisingly reiterated his dovish stance in a UK newspaper, and placed his own emphasis on consumption data (in contrast to Haldane last week, who pointed towards wages), while McCafferty explained, in a separate interview, why he voted for a hike in June.

Back to the action, USD/JPY has retraced the early selloff as central bank trading teams walked to their desks. Bund futures open higher, following USTs before settling in a tight range as curves steepen marginally. European equity markets trim opening losses, led by insurers and banks. Thin trading likely into European afternoon as U.S. cash Treasury and equity markets shut for holiday

Speaking of tech, the Nasdaq "glitch" that froze the prices of an unknown number of companies at 123.47 continues, appears to have been partially resolved.

Overnight, there were two central bank announcements, with both Autralia's RBA and the Swedish Riksbank keeping rates on hold as expected, at 1.5% and -0.5%, respectively, also investors were disappointed as Australia’s central bank failed to join global counterparts in talking up policy tightening after warning that a "rising AUD complicated the economic adjustment." EUR/SEK traded sharply higher despite the Riksbank removing its easing bias as policy makers leave rest of the repo rate path unchanged.

Markets initially reflected a risk-off reaction to the North Korean ICBM announcement, with UST futures and JPY rallying before gradually reversing through European morning. Asian shares turned lower on Tuesday as earlier gains were quashed by tensions on the Korean peninsula after the latest North Korean launch which landed in Japanese waters, deepening concerns over the isolated nation's nuclear capabilities. North Korea claimed the missile was its first ICBM ever tested, and as a result Australian sovereign bonds caught a bid while the Korean won dropped to the lowest in almost four months. The Bloomberg Dollar Spot Index rose modestly by 0.1% , after jumping 0.5% in the previous session. The dollar strengthened the most in two weeks after a short covering squeeze on Monday, prompted by a paradoxical surge in the manufacturing ISM even as the Manufacturing PMI tumbled to the lowest level since last summer.

Early market optimism sparked by bullish U.S. economic data faded and the yen strengthened as gold was headed for its first gain in four days. European stocks slipped led by telecom and technology shares, while oil also stalled after OPEC production increased. The Australian dollar slumped as the nation’s central bank left rates unchanged.

In Asia, the yen rose as much as 0.5 percent after North Korea’s missile test, rebounding after tumbling 0.9% on Monday. The Aussie dollar dropped 0.9% , erasing an earlier gain. Hong Kong’s Hang Seng fell 1.5%, with Galaxy Entertainment Group Ltd. and Tencent Holdings Ltd. among the biggest losers on concerns about Macau cash access after the latest crackdown on ATMs as well as China's rising regulations on online games.  Sydney shares were boosted by solid retail sales data although the Aussie fell after RBA left policy on hold. The dovish shift however helped local stocks and Australia’s S&P/ASX 200 Index jumped 1.8%, the most since Nov. 10, with stocks bouncing back after a two-day slump totaling 2.3% as banks surged 2.2%. Over in China, the PBOC skipped open market operations for an 8th consecutive session, and with the recent stronger than expected PMI data, has Chinese government bonds lower for a fifth day on concerns Beijing may once again be tightening too aggressively. The Shanghai Composite closed 0.4% lower while iron ore slid 2.9% on China-related concerns and profit taking after recently entering a bull market.

In commodities, WTI crude slipped 0.3% to $46.93 a barrel, after rising 2.2% on Monday for the eighth day in a row as oil had a V-shape rebound (as Citi predicted 2 weeks ago) after falling into a bear market. According to a Bloomberg survey, OPEC production in June climbed 260k b/d to 32.55m b/d, its highest level of the year as Libya and Nigeria pumped more. Half of increase came from the 2 nations, which are not required to reduce output under OPEC-led deal. U.S. crude inventories probably dropped by 2.5m bbl last week, Bloomberg survey shows before the DOE report Thursday.

“Supply is well and truly adequate,” says David Lennox, a resource analyst at Fat Prophets in Sydney “Oil could quite easily revisit its lows again if we don’t see stronger seasonal demand from the U.S. and OPEC members increase output further.” For now, however, it is higher.

Gold rose 0.3% to $1,224.15 an ounce, its firstr gain in 4 days, after dropping 1.7% on Monday for its biggest loss of the year amid the dollar’s advance.

In currencies, the yen rose 0.1% to 113.17 per dollar in early trading after the currency tumbled 0.9 percent on Monday. The Bloomberg Dollar Spot Index gained 0.1%, continuing the stronger trend observed on Monday. The pound fell 0.2 percent to $1.2917 after halting an eight-day rally on Monday.  The euro was also 0.2 percent lower at $1.1351.

In rates, the yield on 10-year Treasuries rose five basis points to 2.35 percent on Monday, after surging 16 basis points last week. The US bonds market is closed Tuesday. U.K. 10-year yields dropped one basis point to 1.24 percent.

Key overnight headlines:

  • North Korea claims latest missile fired was an ICBM capable of hitting anywhere in the world; China foreign ministry says it opposes missile launch activities that go against UN resolutions, urges restraint
  • Abe says N Korean threat escalating; Japan-U.S.-S.Korea to work together
  • RBA: keeps rates unchanged; says inflation and the economy to strengthen
    gradually; appreciating AUD would complicated the economic adjustment
  • Riksbank keeps rates unchanged at -0.50% as expected, also removes easing bias from rate path as expected; warns SEK must not appreciate too rapidly
  • BOE’s McCafferty: would be prudent to hike rates now given the balance of monetary policy
  • BOE: warns banks and finance firms to monitor risks in relation to high consumer credit levels
  • BOC’s Poloz sees inflation well into uptrend in 1H 2018: HB
  • BOJ ’regime change’ would bolster public confidence, Abe adviser Honda says
  • China’s 2017 economic growth may be higher than 2016: Securities News

Market Snapshot

  • S&P 500 futures up 0.2% to 2,429.01
  • Crude oil down 0.4% to $46.89/bbl
  • Natgas up 0.4% to $2.96/Mmbtu
  • Gold up 0.4% to $1,223.70/oz
  • Silver down 0.07% to $16.03/oz

Looking at the day ahead, with it being Independence Day in the US and with markets across the pond subsequently closed, it will be a quiet day ahead. Data-wise the only release due is the PPI for the Euro area this morning, which added more headaches to the ECB after printing -0.4% M/M, missing expectations of a -0.2% drop. It’s worth noting some of the ECB speak however with both Praet (1.30pm BST) and Nowotny (5.30pm BST) scheduled to speak. We’ll also get the latest ECB CSPP monthly data while the BoE will publish the record of the FPC meeting held last week. China President Xi Jingping is also due to visit Russia President Putin today in Moscow, ahead of Friday's G-20 meeting.

* * *

DB's Jim Reid concludes the overnight wrap

Welcome to what I last year christened AMEXIT Day. Given all the current talk about Brexit we should maybe ask our cousins across the pond how they coped with leaving the British Empire 241 years ago! Anyway this could be my last ever EMR this morning as the job of a lifetime came up yesterday. Long-time readers will know that as a kid I was obsessed with the band Spandau Ballet. Well yesterday the distressing news (to me anyway) came through that lead singer Tony Hadley has permanently left the band. Although the press releases were cryptic it seems the band are going to continue without him. If so they'll need a lead singer and I know every word to every single one of their songs (including obscure album tracks) and have spent a lifetime singing them in my bedroom, at concerts and at Karaoke bars all over London and the south east. There is not a more qualified candidate and therefore I'd expect my application to be accepted. In the unlikely event that it's not we'll be back tomorrow and those in the US will be none the wiser.

Indeed with the US winding down early yesterday ahead of today's holiday, trading was a little thin but the biggest story was the outsized gain in the US manufacturing ISM. The 57.8 reading for June came in well ahead of the consensus estimate of 55.3 with the print also marking a decent 2.9pt increase over May. It also marginally eclipsed February’s reading to be the highest since August 2014. The details were equally supportive. New orders rose a full 4.0pts to 63.5 and the highest since March, production rose 5.3pts to 62.4 and the highest since February while the employment index came in at 57.2 which is a 3.7pt increase versus May. Yesterday’s ISM also stood in contrast to the much lower manufacturing PMI which was revised down 0.1pts yesterday to 52.0 and to the lowest since December last year.

Our US economists noted that the June ISM reading corroborates some of the strength already evidenced in the regional PMI surveys and that the data points to 3% plus real GDP growth in Q2. Needless to say that the employment component of the data is also particularly supportive ahead of Friday’s payrolls print which is the next big data print.

Over in markets yesterday that data sparked a fresh leg higher for Treasury yields with the 10y rising 4.6bps and for the fifth session in succession to 2.351%. In fact that is the first time that the 10y has gone above 2.350% since May 16th. 2y yields were also 2.8bps higher at 1.412% while 30y yields ended 3.3bps higher at 2.868%. Bunds also sold off on the data although the move was much less exaggerated with the 10y finishing just 1.0bp higher at 0.474%. Meanwhile the data also helped the US Dollar to bounce back following a sharp move lower last week. The Dollar index ended +0.62% with EM currencies feeling the pinch. The South African Rand (-1.04%), Turkish Lira (-0.99%), Polish Zloty (-0.96%) and Hungarian Forint (-0.60%) were amongst those to tumble. A similar sell-off was also felt in precious metals with Gold (-1.72%) in particular hitting a seven-week low. I don't think it was to do with the Spandau Ballet news.

Elsewhere, US equity markets were a bit more mixed. A decent rally for banks (+1.45%) and the energy sector (+2.01% after WTI Oil passed $47/bbl) helped the S&P 500 kick off H2 with a +0.23% gain while the Dow (+0.61%) briefly passed its record high intraday. On the other hand the Nasdaq (-0.49%) closed at the lowest level since May 19th as the theme of underperformance for tech stocks continues. The Nasdaq VIX (VXN Index) also hit 18.74 yesterday and the highest since November last year. The VIX on the other hand is hovering at 11.22 and well below the peaks of April and May.

Meanwhile in Europe equity markets bounced back in style. The Stoxx 600 closed +1.06% (although still only pared 50% of last week’s decline), DAX +1.22% and FTSE MIB +2.08%. Financials and energy names were also the big contributors with the moves also getting a helping hand from an overall decent set of European manufacturing PMIs. The June reading for the Euro area was revised up 0.1pts to a seventy-four month high of 57.4 which compares to 57.0 in May. The country breakdown saw Germany (59.6) also hit a 74-month high along with the Netherlands (58.6), Austria (60.7) a 76-month high, Ireland (56.0) a 23- month high and Italy (55.2) and France (54.8) two-month highs. Notably Greece (50.5) also hit a 37-month high and printed above 50 for the first time since August last year. Spain (54.7) did however nudge down to a 2-month low. Outside of the Euro area the data for UK was a little disappointing after dropping 2pts to 54.3 and to the lowest since March.

Staying in Europe, there was a bit of focus on some ECB headlines yesterday. Specifically it was the Reuters article which suggested that some policymakers were having doubts about signalling that the ECB is moving closer to lifting its QE easing bias at this month’s meeting. The article suggested that the ECB could consider removing only part of the easing bias by leaving reference to either the size or duration of QE. In fairness this appears closer to the ‘softer taper’ approach which would be somewhat reflective of Draghi’s Sintra speech last week so the article didn’t appear to be a huge surprise.

The other development to note in Europe yesterday was French President Emmanuel Macron’s speech in parliament. Perhaps most notable was Macron suggesting that he could use a referendum for institutional reforms should parliament fail to sign off major reforms quickly enough. Macron confirmed that he would cut the number of MPs and also allow more proportional representation with an overhaul of the election system to allow smaller parties to be represented better. Looking at referendums over the last two years it’s worth noting that those in Greece (eventually accepting harsher bailout conditions than those voted on), UK and Italy haven’t worked out well for those that have called them so recent history would tell us that this could well be a risky option for Macron should he choose it.

Quickly jumping over to the latest in Asia where bourses are a lot more mixed as we go to print. While the Nikkei (+0.43%) and ASX (+1.72%) have edged higher (the latter boosted by commodity names), the Hang Seng (-1.11%) has fallen sharply in the last 20 minutes into the midday break although the exact reasons are not entirely clear, while the Shanghai Comp (-0.50%) and Kospi (-0.32%) are also down. There is a bit of focus on comments from China President Xi about a “negative” turn in its relationship with the US following a telephone conversation with President Trump on Monday. Meanwhile the Yen briefly spiked on the news that North Korea has tested another ballistic missile in to the Sea of Japan. The other event of note overnight is the RBA meeting where as expected there was no change to policy, however a slump in the Aussie Dollar (-0.50%) immediately following the statement release suggested that overall tone was a bit more cautious from policy makers than perhaps expected.

Wrapping up the remaining data yesterday, the only other release in Europe was the unemployment rate for the Euro area which was reported as holding steady at 9.3% in May. In the US we learned that construction spending in May was flat after expectations had been for a modest rise. Finally late in the evening total vehicle sales for June came in at an annualized 16.4m which was a fraction lower than expected.

Looking at the day ahead, with it being Independence Day in the US and with markets across the pond subsequently closed, it looks set to be a pretty quiet day ahead. Data-wise the only release due is the PPI for the Euro area this morning (-0.2% mom expected). It’s worth noting some of the ECB speak however with both Praet (1.30pm BST) and Nowotny (5.30pm BST) scheduled to speak. We’ll also get the latest ECB CSPP monthly data while the BoE will publish the record of the FPC meeting held last week. China President Xi Jingping is also due to visit Russia President Putin today in Moscow, so that might be worth  keeping an eye on.