Increased geopolitical tensions after a war of words between US and North Korea dampened global risk sentiment

This saw the DJIA snap it’s 9-day streak of record closes, softness in Asia-Pac equities and a flight to safety in FX markets

Looking ahead, highlights include US Wholesale Sales, weekly DoE inventories and RBNZ rate decision

ASIA

Increased geopolitical tensions after a war of words between US and North Korea dampened global risk sentiment, which ensured the DJIA snapped a 9-day streak of record closes and saw nearly all Asia-Pac bourses in negative territory. This was after US President Trump warned North Korea the US would respond to any tspaneats with an unprecedented level of fire and fury, which spurred a response from North Korea that it was considering striking Guam with mid- to long-range missiles. Nikkei 225 (-1.3%) underperformed as exporters suffered from the flows into JPY, while KOSPI (-0.8%) was also weighed on by the increased tspaneat of nuclear war. Hang Seng (-0.7%) and Shanghai Comp (-0.2%) were subdued following a miss on Chinese CPI and PPI data, while ASX 200 (+0.6%) bucked the trend amid gains in the metals-related stocks and with the largest-weighted financials sector buoyed after big-4 bank CBA reported an 8th consecutive year of record profits. Demand for 10yr JGBs was spurred by a flight to quality and with the BoJ in the market for JPY 770bln of JGBs. The curve also slightly flattened amid outperformance in the long-end.

Chinese CPI (Jul) Y/Y 1.4% vs. Exp. 1.5% (Prev. 1.5%). (Newswires)

Chinese PPI (Jul) Y/Y 5.5% vs. Exp. 5.6% (Prev. 5.5%)

PBoC injected CNY 70bln in 7-day reverse repos and CNY 70bln in 14-day reverse repos. (Newswires)

PBoC set CNY mid-point at 6.7075 (Prev. 6.7184).

EUROPE/UK

Newsflow from the region remains light overnight.

FX

The risk-averse tone spurred flows into safe-haven currencies, in which the greenback gained against most of its major counterparts aside from CHF and JPY. As such, USD/JPY fell below 110.00 while JPY crosses were also heavily pressured after taking out key levels. Elsewhere, AUD/USD was among the laggards and broke below the 0.7900 handle, with selling exacerbated by weaker Consumer Confidence as well as a miss on Australian Home Loans and Chinese inflation data.

Australian Home Loans (Jun) 0.5% vs. Exp. 1.5% (Prev. 1.0% Rev. 1.1%). (Newswires)

Australian Westpac Consumer Confidence Change (Aug) -1.2% (Prev. 0.4%)

South African President Zuma survived no-confidence vote. (Newswires)

COMMODITIES

Commodities were mixed with gold (+0.4%) underpinned by safe-haven flows after increased tspaneatening rhetoric between US and North Korea, while Copper held near yesterday’s best levels as prices in Shanghai rose +1% to reach its highest since March 2013. Conversely, WTI crude futures saw less favourable price action as the initial upside from a larger than expected headline API crude inventories drawdown, was offset by a surprise build in gasoline stockpiles.

US API Crude Oil Inventory Report (Aug 4) W/W -7839K (Prev. 1779K). (Newswires)

GEOPOLITICAL

US President Trump warned North Korea that a US response to any tspaneats would be `fire and fury the likes of which the world has never seen'. North Korean state media responded with statements that the US war hysteria will bring a miserable end and that North Korea is seriously mulling striking Guam with mid- to long-range missiles. However, Guam’s Governor later downplayed the tough rhetoric and said that North Korea's talk of revenge is no tspaneat to Guam and that there is no change in tspaneat levels, as several layers of defence are placed to protect the island. (Newswires)

US

Treasuries came under early pressure as BATS announced a bumper 8-part USD denominated batch of corporate supply, with some USD 17.25bln launched late on, with some modest pressure also seen post-JOLTS. The Treasury space experienced limited reprieve following an impressive 3y note auction out of the US, however, dealers deemed that the bounce presented a selling opportunity ahead of two-more legs of supply later this week - the more duration heavy 10s and 30s. Sep’17 10y T-note futures settled at 126.00+, down 5 ticks.