European Morning Briefing: Fresh Push into Havens to Hit Stocks
Stocks seen lower; USD/JPY 108.65-66; bund yield 0.340%; Brent crude $53.15; gold $1339.61
-North Korea Gives Defiant Response to U.S. Over Latest Nuclear Test
-Fed's Kaplan Urges Patience With Further Rate Increases
-Fed's Kashkari Warns Rate Increases May Be Hurting Economy
-Shell Opens First Service Station in Mexico
-Biggest U.S. Refinery May Stay Shut Until Weekend
Watch For: Germany manufacturing orders; Italy retail sales; Poland interest rate decision
North Korea issued a defiant response to U.S. attempts to impose new sanctions for its latest nuclear test, declaring that it wasn't cowed by the Trump administration's warnings and hinting at an unspecified "counteroffensive."
A statement attributed to a spokesman for North Korea's Ministry of Foreign Affairs on Tuesday said that President Donald Trump's warnings last month of "fire and fury" showed that it was the U.S. that was "begging for war" -- not North Korea, as U.S. ambassador to the United Nations Nikki Haley said on Monday during an emergency Security Council meeting.
"With the emergence of the Trump administration, the U.S. has become all the more reckless in its attempts to completely obliterate the sovereignty...of the DPRK, and we were left with no other choice than redoubling our efforts to strengthen the state nuclear force," the foreign ministry spokesman said.
Federal Reserve Bank of Dallas President Robert Kaplan on Tuesday urged patience with regards to any further rate increases in the near term to give central bankers more time to see if inflationary pressures increase.
"I still think the cyclical forces of a tighter labor force are likely to lead to inflationary pressures," Mr. Kaplan said . "But I think we can afford to be a little bit more patient."
"We may still raise rates this year, and I still may be an advocate for raising rates but I want to wait and see more information," he added.
Mr. Kaplan also commented on the Fed's balance sheet, saying he is in favor of starting to shrink it "as soon as we can."
Federal Reserve Bank of Minneapolis President Neel Kashkari amped up his criticism of rate rises by the U.S. central bank Tuesday.
Mr. Kashkari said rate rises may be playing a part in persistently weak price pressures and a lack of wage gains, despite what is historically a hot job market.
"It may be that monetary policy is working exactly as we think it should" and boosts in rates have indeed slowed the economy, Mr. Kashkari said. Given the rate rises and projections of continued increases, "maybe we shouldn't be surprised" inflation has been too low, he said.
"Maybe our rate hikes are doing real harm," amid evidence "these premature hikes we've been embarked on are not free" and are coming at an unexpected cost, Mr. Kashkari said.
European equities face heavy opening losses Wednesday, with DAX futures down 43 points and FTSE 100 futures 30 points lower.
Selling returned to Asian markets Wednesday, though there weren't big declines but rather a continuation of recent risk-off sentiment.
Japan's Nikkei Stock Average hit a fresh four-month low while falling 0.3% amid weakness in export and financial stocks. Banks were leading the declines in Australia, where the S&P/ASX 200 was also down 0.3%.
Similar losses were seen elsewhere in the region, except for Hong Kong. There, the Hang Seng Index-among the world's best-performing stock benchmarks this year-fell 0.9% weighed by a 1.4% drop in index heavyweight HSBC and declines of at least 1% in Chinese-based banks.
On Wall Street, the Dow Jones Industrial Average fell 234 points Tuesday, as threats from North Korea and another powerful hurricane weighed on major indexes.
The blue-chip index fell 1.1%, after declining nearly 278 points earlier in the session. It was the Dow industrials' biggest one-day drop since Aug. 17.
The S&P 500 declined 0.8% and the Nasdaq Composite shed 0.9%, while the CBOE Volatility Index, a measure of expected swings in the S&P 500, jumped 21%.
"There is no solid game plan as to what we can do with North Korea," said Larry Adam, Deutsche Bank Wealth Management's chief investment officer. "People are getting nervous about that."
Royal Dutch Shell has opened its first service station in Mexico amid plans by the company to invest some $1 billion over the next decade in the country.
However, Shell said the planned investment will take place if "market conditions continue to develop at their current rate." Shell said the investments would include "expanding and improving the retail network, improving fuel logistics infrastructure and developing partnerships to deliver" products and services to consumers and businesses.
Shell also plans to make investments in other developing markets including India, China, Indonesia and Brazil.
Bank of America Merrill Lynch said tactical short positions in the euro "make sense" before the European Central Bank's policy meeting Thursday.
The bank expects the ECB will delay announcing plans to reduce monetary stimulus until October, following the euro's recent rise above $1.20 against the dollar.
"The ECB has to revise inflation projections down, blaming the strong euro, and to acknowledge further downside risks," BAML said. "The ECB should cap the euro for now."
BAML said the ECB had been hoping "to exit QE under cover of the Fed's adherence to a predictable path of normalisation," but this has been complicated by "stubbornly low" U.S. inflation and U.S. political uncertainty.
Dollar-yen has hit a series of one-week lows over the past 24 hours, as the greenback faces broad pressure in part because of fresh doubt about the future pace of U.S. rate hikes following Friday's muted jobs report. Then there's the prospect of a major hurricane slamming into Florida as soon as Sunday and the economic hit that may cause right on the heals of Harvey devastating Texas.
The WSJ Dollar Index settled Tuesday at a fresh one-year low and dipped further in Asia to 85.28. The dollar's August low of Y108.26 is likely the next downside target for the U.S. currency.
Expectations that U.S. rates will remain lower, compounded by political gridlock in Washington, have driven the dollar down 8.2% this year.
"About the only positive things that can be said for the dollar is that its tumble over the past few months has been severe," Scotiabank analysts said in a research note. "The dollar may have to consolidate or correct before additional, significant losses can follow."
At 0350 GMT, USD/JPY was 108.65-66, EUR/USD was 1.1909-12 and GBP/USD was 1.3032-34.
U.S. government bonds strengthened Tuesday as investors flocked to assets traditionally considered safe and reassessed the future path of interest rate increases.
The yield on the benchmark 10-year Treasury note fell to a 2017 low of 2.072% compared with 2.157% on Friday, in the largest one-day decline since May. Many factors pushed bond yields lower Tuesday, analysts said. U.S. stock declines led investors to assets considered safe, while the Fed's Lael Brainard made comments perceived as dovish at the Economic Club of New York.
Fed funds futures showed a 32% chance of a rate rise by year-end late Tuesday, down from 47% a month ago.
Government bonds reacted to "what's going on in Asia and the potential for some stalemates in Washington," said Scott Buchta, head of fixed-income strategy at Brean Capital.
If scarcity of QE-eligible German government bonds becomes a pressing issue for the ECB, replacing bund purchases with extra buying of German corporate bonds shouldn't be an option, according to Deutsche Bank strategist Michal Jezek.
The ECB buys corporate bonds based on a benchmark universe reflecting the market value of eligible bonds. Purchasing German bonds disproportionately to the benchmark could raise objections regarding favoritism, he said.
When the ECB stepped down its monthly QE rate to EUR60 billion from EUR80 billion in April, companies with large amounts of debt seemed to be the most affected, according to Bank of America Merrill Lynch strategists.
The laggards in the two months prior to the step-down -- that Mario Draghi insisted was not tapering -- included Unilever, Novartis and Siemens, each with billions of euro debt outstanding.
Oil futures largely maintained Tuesday's gains in early Asian trading.
Prices had been falling, especially for the U.S. benchmark, in the wake of Harvey cutting refined-product creation and transportation but with storm-related halts ending, U.S. oil demand and exports should soon return to pre-storm levels. Meanwhile, gasoline futures continued to retreat following last week's surge. After settling 2.8% below Friday's close, October Nymex gasoline fell another 0.9% to $1.6842/gallon.
Meanwhile, WTI was off 8 cents at $48.57/barrel and November Brent was down 23 cents at $53.15.
London spot gold was steady in Asian trading, continuing to sit at its best level in nearly a year.
Dovish remarks by Fed officials on raising rates has been the latest catalyst, although investors' focus remains on Thursday's ECB meeting.
At 0218 GMT, spot gold was up 15 cents at $1,339.61/troy ounce.
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