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Global Markets:

• Asian stock markets: Nikkei rose 1.12% %, Shanghai Composite gained 0.10 %, Hang Seng fell 0.08 %, ASX 200 climbed 0.60 %
• Commodities: Gold at $1328.77 (-0.52 %), Silver at $17.81 (-0.47 %), WTI Oil at $48.01 (-0.12 %), Brent Oil at $53.76 (-0.15%)
• Rates: US 10-year yield at 2.13, UK 10-year yield at 1.04, German 10-year yield at 0.335

News & Data:

• (AUD) NAB Business Confidence 5 vs 12 previous
• (JPY) Prelim Machine Tool Orders y/y 36.3 % vs 28.0 % previous
• (EUR) Italian Industrial Production m/m 0.1 % vs -0.5 % expected
• (CAD) Housing Starts 223 K vs 216 K expected
• UN Security Council Votes To Increase Sanctions On North Korea
• Oil prices dip as traders assess U.S. hurricane impact- RTRS

Markets Update:

Following a firm lead on Wall Street, further upside was seen in Asian equity markets as Hurricane Irma and North Korea concerns wane. The Nikkei rose 1 percent, shadowed closely by the Kospi gaining .22% with the Shanghai Composite trading higher by .10%. Meanwhile, the Hang Seng Index declined .08%.

USD/JPY action is little changed on the session. To the upside, resistance stands at 109.50 with support not expected to appear until the unit taps the 109 handle.

EUR/USD also effectively unchanged on the session. Current support positioned at 1.1950 with the candles showing signs of weakening here. The next downside target in view is September’s monthly opening level at 1.1913, followed closely by the 1.19 handle. Technically speaking, downside is favored in this market right now given the upbeat dollar. Be that as it may, it’s advised to keep USDX weekly resistance at 11854 on the radar as the dollar could turn from here.

AUD/USD slipped lower during Sydney this morning, thanks largely to another disappointing result from the weekly consumer confidence index. Recently breaking through key support at 0.8050, price is now largely free to challenge nearby support at 0.80 – a watched level in this market.

Alongside the Aussie dollar, gold also dropped marginally lower following its overnight decline, tackling support at 1325.9 and possibly clearing the runway south down to the 1320.4 neighbourhood.

Upcoming Events:

• 05:30 GMT – (EUR) French Non-Farm Payrolls Q2
• 08:30 GMT – (GBP) CPI y/y
• 08:30 GMT – (GBP) PPI Input m/m
• 08:30 GMT – (GBP) RPI y/y
• 13:45 GMT – (EUR) ECB’s Constancio Speaks
• 14:00 GMT – (USD) JOLTS Job Openings
• 23:50 GMT – (JPY) BSI Large Manufacturing Conditions (Q3)

Market movers today

On a day with only tier-2 data out on the global front, focus is likely to continue to be on the situation with North Korea, where markets will digest the UN vote yesterday. Further reports on the cost of Hurricane Irma may also affect whether the boost to risk sentiment over the past days has more legs (see below).

It is fairly quiet on the global data front today. The UK is due to release CPI for August where we look for a rise in CPI of 0.5% m/m (rounded up), which should be enough to push CPI inflation up from 2.6% to 2.8% y/y – in line with consensus.

The US is due to release the NFIB small business optimism index for August. The index rose sharply after the election of Donald Trump but levelled off in early 2017. However, last month it jumped higher again, adding to signs that US activity is re-gaining momentum. Consensus is for a small decline to 104.8 from the very high level 105.2 in July.

In Scandi it is time for Swedish inflation and the regional network survey from Norway. We look for Swedish inflation to be higher than consensus and the Riksbank's estimate, see Scandi Markets on the next page for more.

Selected market news

Risk appetite continued to strengthen yesterday. US stocks rallied more than 1% to a new cycle high as easing event risks are letting the strengthening business cycle shine through. See also Strategy – Strong cycle while US debt limit risk is postponed, 8 September 2017. The three event risks weighing on markets (North Korea, hurricanes and the US debt limit) have all eased and paved the way for a risk rally. US bond yields moved higher in response and EUR/USD corrected a bit further falling below 1.20 yesterday.

The UN Security Council last night agreed unanimously to step up sanctions against North Korea following its sixth and most powerful nuclear test on 3 September, see Reuters. After a week of negotiations a watered down resolution was voted through the Council as the US had to drop several measures to gain support from Russia and China. Instead of a full oil embargo, the resolution implies a reduction in oil and fuel exports to North Korea. New language was also added urging ‘further work to reduce tensions so as to advance the prospects for a comprehensive settlement'. The latter is likely to be a demand from Russia and China that do not believe sanctions are likely to stop the regime in Pyongyang from its nuclear ambitions.

In the UK, Prime Minister Theresa May won a small victory as the EU withdrawal bill passed in parliament with a vote of 326 to 290, see Bloomberg. It has been controversial as it gives ministers strong powers to change legislation without it being fully accepted by parliament (so-called ‘Henry VIII powers' named after the Tudor King).

In Norway, the parliamentary elections led to the re-election of the conservative government. Hence, any short- or long-term uncertainty regarding economic policy should be reduced.

Key Points:

• BOJ reaches 75% ownership of the ETF market.
• Eventual unwinding poses significant risk levels.
• Watch for long term damage to ETF markets on TOPIX.

There is no doubt that the past seven years has been a watershed for macroeconomic policy, as well as financial markets, as central banks have ardently cast aside the accepted playbook and moved into the realm of policy experimentation. Subsequently, what was birthed was the quantitative easing process which saw the Bank of Japan inject huge amounts of money into the broader economy in an attempt to stimulate spending and investment activity.

However, what started out as the noblest of endeavours has quickly turned farcical as the BOJ quickly moved from running the printing presses to targeted injections of funds directly into the ETF market. Initially, this was welcomed by the broader sector as a way to provide liquidity and cash to the Exchange Traded Funds in an attempt to stimulate some economic growth and inflation. Instead, the central bank has been slowly hoovering up the majority of ETF sales in the past five years and this has caused some significant market distortions.

In fact, the most recent figures show the Bank of Japan holding just below 75% of the total present volume of the ETF market. This is staggering to say the least and should make the free market proponents amongst us queasy with risk. Subsequently, ETF assets held by the bank have surged 10 fold since the early 2010’s to the current epic proportions.

This pattern of non-monetary grade asset purchases is relatively problematic given the risk of ongoing distortions in values. Holders of ETF’s would need to ask themselves what will occur when the central bank starts to unwind those positions given that they form the major buyer in the market. The reality is that ETF values would crash relatively quickly once the central bank makes moves to unwind its positions. Subsequently, there is an inherent risk in any central bank dealing directly with the market through an asset such as an ETF.

In fact, the major question that immediately pops into my mind is the potential for calamity on the broader equity market if and when the bank starts to sell off their ETF positions. At present levels, ETF’s only represent around 5% of the TOPIX market but this is not an inconsequential figure and commencing a selling phase could signal the broader market that the game is up.

Ultimately, there is rising levels of risk within the Japanese markets and much of this is due to the uncertain outcomes around the Bank of Japan’s misguided quantitative easing program. Subsequently, it will remain to be seen what damage the inevitable unwind causes but one thing is for certain….there are no free lunches in economics.

Asia Summary

Asian equity markets opened higher tracking the strength in the US session. Where the USD continued its relief rally after north Korea failed to launch as missile over the weekend and Hurricane Irma impact was less than expected in the US. Some analysts have also pointed towards increasingly stronger China data and rising inflation as another trigger to spur the buying along. The PBOC weakened the yuan reference rate by 0.4% to 6.5277, the first time in 12 sessions. Offshore yuan fell to a 6-month low on the weaker setting. PBOC did again skip open market operations for the 4th consecutive session, has not happened since early January.

The UN Security Council voted unanimously to implement stronger sanctions against North Korea. New measures will ban all textile exports, however are softer than US’s initial proposal. USD/KRW was little changed in the session and North Korea failed to comment. In the UK Lawmakers voted against opposition labor party attempt to block EU withdrawal bill; vote 326-290, Brexit bill to move to next stage. The Sterling showed muted gains on the news.

Key economic data

(AU) AUSTRALIA AUG NAB BUSINESS CONFIDENCE: 5 V 12 PRIOR; CONDITIONS: 15 V 14 PRIOR (highest level since early 2008)

(AU) Australia ANZ Roy Morgan Weekly Consumer Confidence Index: 109.8 v 114.1 prior

(PH) Philippines Jul Trade Balance: -$1.65B v -$2.4Be

(KR) South Korea Jul M2 Money Supply M/M: -0.2% v 0.4% prior; L Money Supply M/M: 0.9% v 0.3% prior

Speakers and Press

China/Hong Kong

(CN) PBoC Vice Gov Yin Yong: financial risks are on the rise while anti money-laundering efforts face challenges

(HK) Hong Kong Financial Sec Chan: HK's economy has been "very positive" in recent two months after better-than-expected growth in Q2

(CN) China Premier Li: China is resolute about opening up; Reiterates to continue proactive Fiscal policy and prudent monetary policy - press

Korea

(KR) UN SECURITY COUNCIL VOTES IN FAVOR OF INCREASING SANCTIONS AGAINST NORTH KOREA

(KR) South Korea: N. Korea is technically ready for a nuclear test

(US) US launches missile tracking plane from Kadena airbase - Japan press

Japan

(JP) Japan PM Abe Cabinet approval rating rises to 50%, up 8 pct points in poll taken Sept 8-10 – Yomiuri

Other

(UK) Lawmakers votes against opposition labor party attempt to block EU withdrawal bill; vote 326-290, Brexit bill to move to next stage

(US) US Senate Majority Leader McConnell said the debt limit will not have to be increased until 'well into 2018' 'amid the availability of extraordinary measures' - NYT Interview

Asian Equity Indices/Futures (00:00ET)

Nikkei 1.0%, Hang Seng 0.0%; Shanghai Composite +0.1%, ASX200 +0.7%, Kospi +0.1%

Equity Futures: S&P500 -0.0%; Nasdaq100 +0.0%, Dax -0.1%, FTSE100 -0.1%

FX ranges/Commodities/Fixed Income (00:00ET)

EUR 1.1964-1.1946; JPY 109.58-109.24; AUD 0.8034-0.7998; NZD 0.7267-0.7226

Dec Gold -0.4% at $1,329/oz; Oct Crude Oil -0.1% at $48.02/brl; Sept Copper -0.6% at $3.05/lb

GLD SPDR Gold Trust ETF daily holdings +0.1% to 835.7 metric tonnes

(AU) Australia sells A$150M 2022 Indexed Bonds; avg yield 0.4025%; bid-to-cover 3.98x

(CN) PBOC SKIPS OPEN MARKET OPERATIONS (OMO) V SKIPPED PRIOR (4th consecutive skip, most since early Jan)

USD/CNY (CN) PBOC SETS YUAN REFERENCE RATE AT: 6.5277 V 6.4997 PRIOR (1st weaker setting in 12 sessions)

JGB (JP) Japan MoF sells ¥1.78T in 5-yr JGBS; avg yield -0.110%; bid-to-cover 4.07x

Equities notable movers

Australia/New Zealand

SGH.AU nnounces cost cutting measures, to cut 7% of employees in Australia; +3%

RAP.AU Developing the world’s first clinically-tested, regulatory-cleared respiratory disease diagnostic test and management tools for smartphones - Investor presentation; +16%

Hong Kong/China

1222.HK To sell 60% stake in site in Hong Kong for HK$2.44B; +4.3%

Japan

6502.JP Toshiba reportedly to sell chip unit to Western Digital-led consortium - Japanese press; +0.3%

For the 24 hours to 23:00 GMT, the AUD declined 0.14% against the USD and closed at 0.803.

LME Copper prices declined 0.6% or $43.0/MT to $6737.0/MT. Aluminium prices rose 1.4% or $28.5/MT to $2100.5/MT.

In the Asian session, at GMT0300, the pair is trading at 0.8013, with the AUD trading 0.21% lower against the USD from yesterday's close.

Early morning data indicated that Australia's NAB business conditions index edged up to a level of 15.0 in August, notching its highest level in nine years. The index had registered a revised level of 14.0 in the previous month. On the other hand, the nation's NAB business confidence index sharply declined to a level of 5.0 in August, after recording a level of 12.0 in the prior month.

The pair is expected to find support at 0.7988, and a fall through could take it to the next support level of 0.7963. The pair is expected to find its first resistance at 0.8048, and a rise through could take it to the next resistance level of 0.8083.

Going ahead, Australia's Westpac consumer confidence index for September, due to release overnight, will be on investors' radar.

The currency pair is trading below its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the EUR declined 0.37% against the USD and closed at 1.1964.

On the macro front, Italy’s seasonally adjusted industrial production unexpectedly climbed 0.1% on a monthly basis in July, advancing for the third straight month and confounding market expectations for a drop of 0.3%. In the previous month, industrial production had risen 1.1%.

The US Dollar advanced against its major peers, as downgrading of Hurricane Irma from a Category 5 storm to a tropical storm helped mitigate investors’ concerns over its impact on the US economy.

In the Asian session, at GMT0300, the pair is trading at 1.1962, with the EUR trading a tad lower against the USD from yesterday’s close.

The pair is expected to find support at 1.1929, and a fall through could take it to the next support level of 1.1895. The pair is expected to find its first resistance at 1.2013, and a rise through could take it to the next resistance level of 1.2063.

Amid a lack of macroeconomic releases in the Euro-zone today, investors will look forward to the release of the US NFIB small business optimism index for August, slated in a few hours along with the nation’s JOLTs job openings for July, due later today.

The currency pair is trading below its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the GBP slightly declined against the USD and closed at 1.3177.

In the Asian session, at GMT0300, the pair is trading at 1.3178, with the GBP trading marginally higher against the USD from yesterday's close.

Meanwhile, UK's lawmakers voted in favour of Brexit bill in Parliament to end the nation's membership with the EU.

The pair is expected to find support at 1.3152, and a fall through could take it to the next support level of 1.3126. The pair is expected to find its first resistance at 1.3213, and a rise through could take it to the next resistance level of 1.3248.

Moving ahead, investors will keep a close watch on UK's consumer price inflation data for August, slated to release in a few hours.

The currency pair is showing convergence with its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the USD rose 0.77% against the JPY and closed at 109.28, as demand for safe-haven currency diminished after Hurricane Irma caused less damage than initially anticipated and as North Korea celebrated its founding day without new provocations.

On the macro front, Japan’s preliminary machine tool orders rose 36.3% on a yearly basis in August, after advancing 28.0% in the previous month.

In the Asian session, at GMT0300, the pair is trading at 109.30, with the USD trading a tad higher against the JPY from yesterday’s close.

The pair is expected to find support at 108.55, and a fall through could take it to the next support level of 107.81. The pair is expected to find its first resistance at 109.81, and a rise through could take it to the next resistance level of 110.33.

The currency pair is trading above its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the USD rose 0.61% against the CHF and closed at 0.9555.

In economic news, Switzerland’s total sight deposits stood at CHF579.0 billion in the week ended 08 September, down from CHF579.2 billion reported in the previous week.

In the Asian session, at GMT0300, the pair is trading at 0.9560, with the USD trading slightly higher against the CHF from yesterday’s close.

The pair is expected to find support at 0.9506, and a fall through could take it to the next support level of 0.9451. The pair is expected to find its first resistance at 0.9594, and a rise through could take it to the next resistance level of 0.9627.

With no macroeconomic releases in the Switzerland today, investor sentiment would be governed by global macroeconomic events.

The currency pair is trading above its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the USD declined 0.44% against the CAD and closed at 1.2101.

The Canadian Dollar gained ground against the USD, after Canada’s seasonally adjusted housing starts surprisingly rose to a level of 223.2K in August, defying market consensus for a fall to a level of 216.0K and following a revised level of 222.0K in the previous month.

In the Asian session, at GMT0300, the pair is trading at 1.2110, with the USD trading 0.07% higher against the CAD from yesterday’s close.

The pair is expected to find support at 1.2082, and a fall through could take it to the next support level of 1.2054. The pair is expected to find its first resistance at 1.2154, and a rise through could take it to the next resistance level of 1.2198.

The currency pair is showing convergence with its 20 Hr and 50 Hr moving averages.