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Over a week after North Korea said it conducted its sixth nuclear test on Sept. 3, prompting the U.N. Security Council to step up sanctions with a ban on the reclusive regime’s textile exports and a cap on fuel supplies, South Korea said on Wednesday traces of radioactive xenon gas were confirmed to be from a North Korean nuclear test earlier this month, although it noted that it was unable to conclude whether the test had been a hydrogen bomb as Pyongyang claimed.

According to Reuters, South Korea’s Nuclear Safety and Security Commission (NSSC) said its land-based xenon detector in the northeastern part of the country found traces of xenon-133 isotope on nine occasions, while its mobile equipment off the country’s east coast detected traces of the isotope four times.

“It was difficult to find out how powerful the nuclear test was with the amount of xenon detected, but we can say the xenon was from North Korea,” Choi Jongbae, executive commissioner, told a news conference in Seoul. 

 

The commission could not confirm what kind of nuclear test the North conducted, he added.

A US monitoring group also said on Wednesday that North Korea’s latest nuclear test had had a yield of 250 kilotons, which is much higher than earlier, official estimates. The authoritative US website 38 North, which is linked to the Johns Hopkins University, said that it was lifting its estimate for the yield of the blast to “roughly 250 kilotons.” The figure is more than 16 times the size of the 15-kiloton US bomb that destroyed the Japanese city of Hiroshima in 1945. Other official estimates of the yield vary from South Korea’s 50 kilotons to Japan’s 160.

The NSSC also said the xenon traces detected had no impact on South Korea’s environment and population.  Xenon is a naturally occurring, colorless gas that is used in manufacturing of some sorts of lights. But the detected xenon-133 is a radioactive isotope that does not occur naturally and which has been linked to North Korea’s nuclear tests in the past.

Meanwhile, Seoul announced on Wednesday that it had conducted its first live-fire drill for an advanced air-launched cruise missile in a bid to strengthen the country’s pre-emptive strike capability against North Korea.

The Taurus missile launched from an F-15 jetfighter traveled through obstacles at low altitudes before striking a target off the South’s western coast, the Defense Ministry said. The missile, manufactured by Germany’s Taurus Systems, is reported to have a maximum range of 500 kilometers and its stealth characteristics allow it to avoid radar detection.

Meanwhile, North Korea, has remained defiant. As we will detail in a subsequent article, Kim’s regime reacted to the “evil” sanctions by vowing on Wednesday to further step up its weapons programs.

“The adoption of another illegal and evil ‘resolution on sanctions’ piloted by the US served as an occasion for the DPRK (North Korea) to verify that the road it chose to go down was absolutely right,” said the North’s Foreign Ministry in a statement published by the state-run KCNA news agency.

“The DPRK will redouble the efforts to increase its strength to safeguard the country’s sovereignty and right to existence,” it added.

Earlier on Tuesday, President Donald Trump said on Tuesday that the new sanctions on the North were a small step. “I don’t know if it has any impact, but certainly it was nice to get a 15-to-nothing vote, but those sanctions are nothing compared to what ultimately will have to happen,” Trump said in vague but threatening remarks.

Which suggests that more Xenon will be detected soon, and the market’s current state of cautious optimism on the recent N.Korean easing in tensions will be violated.

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After Hurricane Irma overwhelmed the Florida Keys with 15-foot storm surges and 130 mph winds, causing the worst flooding the chain of islands has experienced in nearly a century, federal officials' first assessment of the damage suggests that nearly a quarter of the homes on the island were destroyed, according to the Associated Press. While not every home is beyond repair, officials said no structures escaped some form of damage.

“Basically every house in the Keys was impacted in some way or another,” Federal Emergency Management Agency Administrator Brock Long said at a news conference. “This is why we ask people to leave.”

While residents and business owners in the Upper Keys as far south as Islamorada were allowed back into the area Tuesday morning, Monroe County officials urged people to stay away. “Fuel, water, power & medical super limited,” the county said on Twitter, according to WSJ. The county has about 53,000 housing units, census figures show. Nearly all are on the Keys, a 110-mile ribbon of low-lying islands linked by bridges. Monroe County is home to 79,000 people, the vast majority of whom live on the archipelago.

Elsewhere, federal authorities have maintained their mandatory evacuation order during the early stages of the cleanup. Throughout the state, some 155,000 people are still in shelters and more than 9 million Floridians lack power, exposing them to the unpleasant summer heat. That’s compared with roughly three-quarters-of-a-million customers were still without power in Georgia and the Carolinas by late Tuesday, according to local utilities.

Meanwhile, workers Tuesday rushed to find any victims who had remained on the islands during the storm, and deliver food and water.

"It's going to be pretty hard for those coming home," said Petrona Hernandez, whose concrete home on Plantation Key with 35-foot walls was unscathed, unlike others a few blocks away. "It's going to be devastating to them."

With phone service still unavailable, the full extent of the destruction was still a question mark.

Further north, life in Florida inched closer to normal, with some flights again taking off, curfews lifted and theme parks reopening. Cruise ships that extended their voyages and rode out the storm at sea began returning to port with thousands of passengers. Crews also worked to repair two washed-out, 300-foot sections of US 1, the highway that runs through the Keys, and check the safety of the 42 bridges linking the islands. Florida Gov. Rick Scott on Tuesday said transportation authorities were inspecting those bridges to make sure they can still bear weight.

Meanwhile, the number of deaths blamed on Irma in Florida climbed to 12, in addition to four in South Carolina and two in Georgia. At least 37 people were killed in the Caribbean.

"We've got a lot of work to do, but everybody's going to come together," Florida Gov. Rick Scott said. "We're going to get this state rebuilt."

Search-and-rescue teams made their way into the more distant reaches of the Keys, and an aircraft carrier was positioned off Key West to help. Officials said it was not known how many people ignored evacuation orders and stayed behind in the Keys.

Some of the residents who’ve already returned are becoming so desperate, the sound of helicopters purring overhead elicits a sense of elation – a sign that the recovery effort is under way.

“In Key Largo, Lisa Storey and her husband said they had yet to be contacted by the power company or by city, county or state officials. As she spoke to a reporter, a helicopter passed overhead.

 

‘That's a beautiful sound, a rescue sound,’ she said.”

As the cleanup and recovery effort started in earnest, a few of the most heavily impacted cities, like Miami Beach, were just beginning to reopen, highways leading into the state from Georgia had bumper-to-bumper traffic, and long lines at gas stations remained a major frustration in cities like Fort Myers.

While officials from Florida Power & Light, the state’s largest utility, have said their rebuilding of the power grid could take weeks, the recovery could take even longer in the Keys, where, according to WSJ, the pleasures of island life in the subtropics have long come mixed with danger. One of the worst hurricanes ever to hit the US slammed into the Keys on Labor Day in 1935 at Category 5 strength, killing 408 people, according to the National Hurricane Center.

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The International Energy Agency, which advises most major economies on energy policy, forecast that global oil demand will climb this year by the most in two years amid stronger-than-expected consumption in Europe and the U.S. although it was unclear just how this will offset recently fading demand by the two biggest marginal consumers, China and India. The IEA reported that global oil demand grew very strongly in Y/Y in Q2 2017, by 2.3mmb/d, or 2.4%, and increased its estimate for demand growth in 2017 by 100,000 barrels a day to 1.6 million a day, or 1.7%. The IEA has now raised its 2017 oil-demand growth forecast for three months in a row.

The agency observed that the re-balancing of oversupplied world markets continues with OPEC supplies falling for the first time in five months as reported yesterday, and inventories of refined fuels in developed nations subsiding toward average levels. In August, global oil supply fell by 720 kb/d due to unplanned outages and scheduled maintenance, mainly in non-OPEC countries. OECD commercial stocks were unchanged in July at 3 016 mb, when they normally increase.

“Demand growth continues to be stronger than expected, particularly in Europe and the U.S.,” the Paris-based agency said in its monthly report.

The IEA also said that the impact of Hurricane Harvey on global oil markets is “likely to be relatively short-lived,” according to Bloomberg. Although the oil market “coped relatively well” with the disruption caused by this year’s storms, the damage to U.S. facilities will still be felt, according to the report. The country’s production was curbed by about 200,000 barrels a day in August and 300,000 a day in September.

Meanwhile local stockpiles were at “comfortable” levels before the storm hit, while releases from government reserves and plentiful imports from Europe allayed any shortage. Stockpiles of refined fuels in developed nations were close to their five-year average in July, and could fall to or below this level “very soon,” according to the IEA. Crude oil inventories were steady in the same month, when they typically increase.

“Based on recent bets made by investors, expectations are that markets are tightening and that prices will rise, albeit very modestly,” the agency said.

IEA also noted that OPEC boosted its production cut compliance last month to 82% from 75% Its 10 partners fully delivered on their pledged cutbacks for the first time since the agreement started in January, as Russia and Kazakhstan conducted seasonal maintenance work at oilfields, the IEA said.

Still, if OPEC keeps output at current levels the group is unlikely to reduce stockpiles “dramatically” either this year or even in 2018, Neil Atkinson, the head of the IEA’s oil markets and industry division, told Bloomberg in a television interview, suggesting that another OPEC production extension is likely inevitable.

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For the first day in three S&P futures have pulled back modestly from record levels as some investors cautioned that gains had gone too far, too fast, European shares are mixed while Asian equities extended their longest rising streak in almost two months as continued gains in Japan and India offset the losses in Hong Kong. The dollar ended a two-day advance as TSY yields dropped in what has become a close correlation trade (see below) while oil and gold rose, perhaps in response to the ongoing plunge in bitcoin.

Following yesterday’s main, and largely disappointing events – the unveiling of the new iPhone(s) – European shares have faltered as a global equity rally showed signs of flagging, with Apple suppliers struggling after the new iPhone release disappointed with a later than expected shipping date. Chipmakers supplying to Apple were among the worst performers, with AMS down 3.9 percent, while Dialog Semiconductor slipped 1.7 percent and STMicro fell 1.1 percent.

Traders said their shares were under pressure due to Apple’s new $999 iPhone X shipping later than expected, on November 3. The price tag could also dent demand for the device in markets such as China. “With the iPhone coming in around $1,000 it will be interesting to see how healthy demand is,” said Mike Bell, global market strategist at JP Morgan Asset Management.  “If it’s relatively healthy I think it shows that there is still quite a lot of pricing power for U.S. companies and that consumers have confidence.”

Bloomberg writes this morning that record stock prices are provoking concern in some corners of the market, with the number of investors seeking protection from a possible plunge jumping. Leon Cooperman, the billionaire founder of hedge fund Omega Advisors, says a correction could start “very soon.” The imminent reduction of bond purchases by central banks in coming months will put pressure on riskier assets including high-yield bonds and equities, according to Citigroup Inc. According to the latest BofA FMS report, the last month saw the largest jump in market participants “taking out protection” in 14 months.

“Central banks will tread carefully and the direct impact of global tapering on the real economy will likely be modest,” Citigroup economists led by Ebrahim Rahbari wrote in a report. “But there is a material risk in our view that major asset price corrections could be triggered by this global tapering,” with U.S. high-yield corporate debt, euro-region periphery sovereign bonds, euro-area corporate bonds, global equities and emerging-market assets most at risk, they wrote.

Furthermore, geopolitical concerns also remain after North Korea said it will accelerate its plans to acquire a nuclear weapon that can strike the U.S. homeland in its first response to fresh United Nations sanctions. Earlier, Treasury Secretary Steven Mnuchin warned the U.S. may impose additional sanctions on China — potentially cutting off access to the American financial system — if it doesn’t follow through on the new UN restrictions

With all that, Europe’s Stoxx 600 index headed for the first drop in six days after U.S. benchmarks and the MSCI All-Country World Index closed at all-time highs a day earlier. Miners led the decline as the price of industrial metals including copper and nickel retreated.

The MSCI Asia Pacific Index advanced 0.1% with basic materials and consumer discretionary shares rising the most among industry groups. Hong Kong’s Hang Seng Index fell 0.3 percent, while the Shanghai Composite Index fluctuated before adding 0.1 percent.  The Topix index rose 0.6 percent at the close in Tokyo. Australia’s S&P/ASX 200 Index was little changed and the Kospi index in Seoul finished the session 0.2 percent lower. Among Apple suppliers, Hon Hai Precision Industry Co. and Pegatron fell, weighing on the Taiex index, which was down 0.7 percent. AAC Technologies Holdings Inc. in Hong Kong also declined. Apple slid along with some of its biggest suppliers on Tuesday.  Japan’s Topix climbed for a third day as investors focused on the local currency’s decline. India’s benchmark S&P BSE Sensex rose to a five-week high, led by the country’s most-valued company Reliance Industries Ltd. Hong Kong’s Hang Seng Index declined after nearing the key resistance level of 28,000. “Positive overnight leads support Asian markets to seek continued upside in the day, though we may witness more caution within the region,” Jingyi Pan, a market strategist at IG Asia Pte Ltd, wrote in an note

In FX, the overnight session was dominated by a sharp reversal in the pound, with U.K. wages coming in weaker than expected underscored the dilemma facing Bank of England policy makers meeting on Thursday to review interest rates. Meanwhile the theme of inflation uptrend is intact across Europe, with CPI prints in Germany and Spain matching estimates; dollar bulls turn cautious, take some money off the table as market attention turns to U.S. CPI data on Thursday, while Canadian dollar advances as WTI crude rises for a third day; Treasuries and core euro-area bonds trade steady, with brief pressure on bund futures heading into auction supply window.

In rates, the yield on 10-year Treasuries fell one basis point to 2.16 percent.  Germany’s 10-year yield decreased one basis point to 0.39 percent.  Britain’s 10-year yield dipped two basis points to 1.087 percent.

West Texas Intermediate crude extended an advance after the International Energy Agency said global oil demand will climb this year by the most since 2015. Gold climbed 0.1 percent to $1,332.60 an ounce. Copper declined 1.6 percent to $2.99 a pound, the lowest in more than three weeks.  The Bloomberg Commodity Index fell less than 0.05 percent to 84.79.

Economic data include MBA mortgage applications, PPI and oil inventories. Cracker Barrel and United Natural are reporting earnings

Market Snapshot

• S&P 500 futures down 0.1% to 2,493.00
• STOXX Europe 600 down 0.3% to 380.43
• MSCI Asia up 0.2% to 163.07
• MSCI Asia ex Japan down 0.08% to 539.04
• Nikkei up 0.5% to 19,865.82
• Topix up 0.6% to 1,637.33
• Hang Seng Index down 0.3% to 27,894.08
• Shanghai Composite up 0.1% to 3,384.15
• Sensex up 0.5% to 32,328.75
• Australia S&P/ASX 200 down 0.04% to 5,744.26
• Kospi down 0.2% to 2,360.18
• German 10Y yield fell 1.3 bps to 0.388%
• Euro up 0.2% to $1.1986
• Italian 10Y yield rose 5.6 bps to 1.733%
• Spanish 10Y yield fell 0.9 bps to 1.593%
• Brent futures up 0.5% to $54.56/bbl
• Gold spot up 0.1% to $1,333.08
• U.S. Dollar Index little changed at 91.84

Top Overnight News

• Secretary of State Rex Tillerson is consulting U.S. allies in Europe as he seeks a way to toughen restrictions on Iran’s nuclear program a month before President Trump faces a deadline to decide whether to walk away from what he’s called “the worst deal ever”
• Germany’s August harmonized CPI remained unchanged at 1.8% in the final
  print, in line with estimates; Spain August CPI final reading matches
  forecast
• In its first official response to new United Nations sanctions, North Korea said it will accelerate its plans to acquire a nuclear weapon that can strike the U.S. homeland
• North Korea’s latest nuclear test may have been more than twice as powerful as first thought, according to an analysis by 38 North
• Merkel’s bloc gets 37% support, the lowest for 4 months, in Forsa poll
• Tuesday’s protests across France won’t deter the government from pushing through its plan to loosen the country’s labor law, Prime Minister Edouard Philippe said
• U.K. Prime Minister Theresa May is in a double bind as she tries to navigate the politics of Brexit while keeping businesses on side: even when she thinks she’s giving companies what they want, they say she’s made it worse
• Denmark faces negative rates until 2020, central bank study says
• Seadrill Files for Bankruptcy in Bid to Shrink Debt Load
• OPEC Is Said to Discuss Extending Cuts by More Than 3 Months
• Toshiba Signs Memo With Bain, Struggles to Sell Chip Unit
• Bain Is Said to Gather $9.4 Billion for New Fund, Topping Target
• UBS’s Orcel Sees Rocky 2018 For Banks’ Profit as MiFID Kicks In
• Oil Trades Near $48 as IEA Sees Fastest Demand Growth in 2 Years
• Bayer Sells $1.4 Billion of Covestro on Path to Separation
• Trump Premium Gone From U.S. Banks Brings Opportunities: Goldman
• Pandit Sees 30% of Banking Jobs Disappearing in Next Five Years
• Deutsche Bank Said to Pledge Cap on U.S. Use of German Deposits

Asia equity markets traded mixed as the momentum from Wall St. was counterbalanced by weakness in Apple suppliers following the tech giant’s product event. ASX 200 (+0.1%) and Nikkei 225 (+0.5%) gained at the open after a trifecta of record closes for the S&P 500, DJIA and Nasdaq, with strength in commodity names and financials leading the upside in Australia. Shanghai Comp. (- 0.1%) and Hang Seng (-0.3%) were subdued with underperformance in the Hong Kong benchmark on a continued pull-back from the 28,000 level, while disappointment was also seen across the Apple supply chain after the tech giant’s product announcement. 10yr JGBs were lower as positive risk appetite prevailed in Japan, although downside was stemmed amid the BoJ’s presence in the market for just below JPY 1tln of JGBs in 1yr-10yr maturity range. PBOC injected CNY 30bln via 7-day reverse repos, CNY 20bln via 14-day reverse repos and CNY 20bln via 28-day reverse repos. PBoC set CNY mid-point at 6.5382 (Prev. 6.5277)

Top Asian News

• Record Flows to Bearish ETF Shows Taiwan Equities Skepticism
• RBA’s Harper Says Growth Too Slow to Justify Rate Increase
• Baring Private Equity Is Said to Restart Sale of SAI Assurance
• Coal Stocks Lead Declines by Indonesian Miners on Price Concerns
• Topix Index Posts Biggest Three-Day Gain Since May on Tech Rally
• Offshore Yuan Interbank Costs Surge as Banks Seen Hoarding Cash
• Banker Fees on Japan Post Deal Are Said to Top Tobacco Sale

Equity markets trade mixed in Europe, as the FTSE behaves as one of the noticeable underperformers, as both the 100 and 250 struggle amid the pound’s strength yesterday. Sectors see materials underperform, with Glencore and Rio Tinto suffering despite an article from the FT noting market speculation that the two companies merger plans may be revived. The Bund auction will highlight issuance today; the market holds steady as we approach the bidding deadline. However, Portugal and Italy have seen some selling before their respective auctions. Price action has been seen in the UK, as Gilts did see a slight bid ahead of the BoE meeting Thursday, as a result of the marginal miss in the aforementioned UK jobs figures. The UK sold GBP 2.5bln 1.25% in its 2027 Gilt Auction at an average yield 1.161%, b/c 2.25 (Prev. b/c 2.56) and tail 0.2bps Germany sold EUR 2.446bln vs. Exp. EUR 3bln 0.5% 2027 Bund Auction with a b/c 1.6 (Prev. 1.27), average yield 0.39% (Prev. 0.41%) and retention of 18.5% (Prev. 19%)

Top European News

• Merkel Is Said to Want Schaeuble to Keep His Job After Election
• Novo Sees Earlier China Launch for Diabetes Drug Amid Epidemic
• Denmark Faces Negative Rates Until 2020, Central Bank Study Says
• Richemont’s European Sales Disappoint as Asia Races Ahead
• Swatch Falls After Apple Shows LTE-Enabled Watch

In currencies, a nticipation was on the 9.30 UK earnings figures, with slight misses seen in both the average earnings issues. GBP has been thenoticeable mover for the morning, cable still resides around recent highs, as all eyes now move to the BoE tomorrow. The lack of safe-haven flows has continued, with the unwinding of recent positions being the theme of the week. Despite Twitter source comments overnight reporting satellites detected new activity in alternate North Korea tunnel portal areas, suggesting preparations for future underground nuclear tests; no reversal was seen in the risk tone. USD/JPY has continued to trade above 110.00, with the figure behaving as support overnight, bulls will be looking for a break of 110.60 to go on and test 111.00, however, we could see a retest of yesterday’s levels first. UOB are evident of this, placing a long limit order with an entry at 109.80. CHF pairs will be in focus this week with the SNB on Thursday, the mentioned dampening of geopolitical fears in the market have caused some franc selling this week; as USD/CHF looks to trade though 0.9620 and break the Aug 16th downward trendline resistance. EUR/CHF now looks towards August’s high at 1.1537, the bullish attacks could be supported by tone from the SNB tomorrow. ING FX expect the SNB to fan the flames of divergence between itself and the ECB, allowing the rate spreads to widen, one thing to watch tomorrow is if the SNB drop the adverb ‘significantly’ when referring to the strength of CHF.

In commodities, OPEC commentary has once again fluttered into the market, resulting in a marginal bullish push in WTI and Brent crude futures. Bullish comments from the Kuwait oil minister stating that producers should comply with output cuts, were met by comments from Venezuela stating that OPEC and Non-OPEC are not close to a deal, yet did state that all options are open for an OPEC-Led supply cut pact.
DOE raised 2018 crude outlook world oil demand growth to 1.69mln bpd (Prev. 1.61mln bpd). Qatar’s energy minister Al-Sada said that it is appropriate for OPEC to look at measures beyond March and that participating countries have been successful in implementing commitments. (Newswires) Venezuela President Maduro said Opec/Non-Opec output cuts are likely to extend until March next year.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 3.3%
• 8:30am: PPI Final Demand MoM, est. 0.3%, prior -0.1%;
  • PPI Ex Food and Energy MoM, est. 0.2%, prior -0.1%. PPI Ex Food, Energy, Trade YoY, prior 1.9%
  • PPI Ex Food, Energy, Trade MoM, est. 0.1%, prior 0.0%; PPI Ex Food and Energy YoY, est. 2.1%, prior 1.8%
• 2pm: Monthly Budget Statement, est. $119.0b deficit, prior $107.1b deficit

DB’s Jim Reid concludes the overnight wrap

I never thought I’d say these words but man it’s good to be back at work. The last two weeks have been wonderful and brutal in equal measures. The best bit has been taking nearly 2 year old Maisie to various clubs and classes. Although if I hear the Hokey Cokey again I’ll go nuts. As for the twins (James and Eddie) they are doing well. Identification is tricky apart from the fact that Eddie is smaller as unbeknown to us the cord was wrapped around him in the womb and he stopped growing towards the end of the pregnancy. However he is feeding ok now and slowly starting to put on weight. However not as much as James who treats meal times as the bond market treats QE. In fact feeding is brutal, especially at night. With one baby and a hard working, breast feeding wife I’m ashamed to say you can hide a little bit. However with premature twins there is no hiding place. They feed a minimum of 8 times a day and each feed takes around 90 minutes when you include nappy changes, pass the parcelling, the initial feed, the bottle of previously expressed milk as a top up as they are too small and weak to naturally feed for very long, the burping and comforting, then the new round of expressing fresh milk and then finally the cleaning and sterilisation of all the expressing units and bottles for next time. If this goes well at best you can get 90 minutes sleep between feeds.

However more often than not they don’t settle and you need to hold them in your arms until they are so asleep they don’t notice that you’ve put them back in their cot. Sometimes the feeds blend into each other. When in their cot whenever you put them down on their backs they naturally roll on their sides to cuddle each other. It is very sweet and we have many images that will take centre stage at their weddings in years to come. All I can say is being a mum to newborns requires a dedication that is astonishing to watch. More so with twins. Although having been ordered around for the last two weeks I’m looking forward to  revenge so my team had better watch out today.

So what did I miss? Well in my last EMR It was Jackson Hole, (very) elevated North Korean tensions and stress about the debt ceiling that was dominating markets. As it stands the fact that we have freshly agreed UN sanctions probably puts the ball back in the North Korean’s court in so far as the risk of unilateral and immediate US action has thus been reduced. Clearly if NK provokes the situation it will become a live issue again but as it stands the US is highly unlikely to make the next move. At the same time the debt ceiling has obviously been pushed out and with the devastating hurricane perhaps causing less havoc than that feared before the weekend, markets continue to take some safe haven hedges off the table. Indeed 10 year USTs and Bunds have now climbed 14bp and 11bp off their intra-day lows from Friday (+4bp and +6bp yesterday).

The bond market sell off received an extra push yesterday with the UK August inflation print which surprised on the upside. Headline inflation rose 0.6% mom (vs. 0.5% expected), but the bigger surprise was core inflation which increased 0.6% mom, lifting through-year inflation to 2.7% yoy (vs. 2.5% expected) – the highest reading since December 2011. Within the details, the inflation pick up was led by clothing and footwear (+4.6% yoy) and prices for household goods (+4.2% yoy). Elsewhere, the PPI and retail price index were also higher than expected, with PPI at 0.4% mom (vs. 0.1% expected) and RPI at 0.7% mom (vs. 0.5% expected).

In response, Gilts were sold off with yields up 9bp to 1.132%, Sterling rallying 0.91% versus the Greenback and the chance of a rate hike next February rising from 44% to 61% (per the Bloomberg calculator). To be fair, other sovereign bond yields were also higher, in part driven by the improving risk sentiment. Core and peripheral bond yields increased 3-7bp across the maturities, with Bunds (2Y: +3bp; 10Y: +6bp), French OATs (2Y: +3bp; 10Y: +7bp), Italian BTPs (2Y: +3bp; 10Y: +6bp) and Portuguese (2Y: +3bp; 10Y: +5bp) yields all higher Elsewhere, US bond yields were modestly higher yesterday (2Y: +2bp; 10Y: +4bps), but  have rallied 1bp this morning.

Although the inflation print is not going to change the BOE policy rate tomorrow, it will be interesting to see how much of a hawkish tone we get. For those who may have missed it, DB’s Mark Wall has outlined his expectations for the BOE rate decision tomorrow. The team continues to expect the BoE to remain on hold until uncertainty about the Brexit transition diminishes, as too many aspects of the policy trade-off hinge on the outcome. For more details Continuing on the inflation theme, the Swedish inflation print for August wasn’t as weak as feared at -0.2% mom (vs. -0.3% expected) yesterday and later on today, we will get the US PPI reading where our team expect a 0.2% mom print at the core level, which will likely see annual inflation rise three-tenths to 2.1% yoy. All this before the main event of the week tomorrow namely the US’s August CPI inflation reading. Can we buck a trend that has seen US inflation undershoot expectations for 5 months?

Now shifting to the very long term, Austria has just sold €3.5bn of 100 year debt in the largest European century bond sale to date. I’m prepared to predict that none of us reading this will be around to see the bond mature, but it’s worth noting that Austria only became an independent republic again 62 years ago (as the second republic). Investor demand was reportedly strong, with bids reaching €11bn. The deal was priced at a yield of 2.112%, which compares favourably to other recent similar maturity bonds, including: Belgium (€0.1bn bond at 2.057%), Ireland (€0.1bn at 2.116%), Mexico (€1.5bn at 4.21%) and Argentina (US$2.75bn at 7.19%).

Moving on, this morning in Asia, markets are a little mixed but generally slightly higher as we go to print, with the Nikkei (+0.47%), ASX 200 (+0.25%), Kospi (+0.16%) leading the way but with the Hang Seng -0.46% and Chinese bourses only c.0.1% higher. US equity futures are pointing to a slightly softer start. This follows US bourses strengthening to another record high last night with the S&P +0.34% and both the Dow and Nasdaq up c.+0.3%. Within the S&P, only the utilities (-1.75%) and real estate sector were in the red, likely reflecting the higher bond yields, while gains were driven by the Telco and financials space.

In Europe, the Stoxx 600 rose for the fifth consecutive day (+0.52%), which the longest streak since April. Across the region, the DAX (+0.40%), CAC (+0.62%) rose but the FTSE dipped 0.17% likely due to the strength in Sterling. Indeed turning to currencies, most of the action was with Sterling after being up 0.79% versus the Euro and +0.91% versus the USD and to a one year high which slightly eases the pain of buying the new iPhone X! Elsewhere, the US dollar index was marginally higher while the Euro/USD edged up 0.12%. In commodities, WTI oil was 0.33% higher following reports that OPEC producers may extend production cuts. Precious metals were slightly higher (Gold +0.32%; Silver +0.56%) and industrial metals also rose modestly with Copper (+0.42%), Zinc (+1.16%) and Aluminium (+2.70%).

Away from the markets and onto the US tax reform. The messaging continues to be a little mixed. On the one hand Treasury Secretary Mnuchin recognized that “there is no question that the stock market has an expectation we are going to get tax reform done….and we are going to create significant growth…which is what this President and administration is focused on”. Further, he has also signalled that new tax rules could be backdated to January. However, in terms of finer details, Mnuchin echoed similar comments by House Speaker Ryan in that the corporate tax rate will be lower, but unlikely to be as low as the 15% originally envisaged by President Trump. Mnuchin said “I don’t know if we’ll be able to achieve that (15%) given budget issues, but we’re going to get this down to a very competitive level”.

Circling back to Brexit. Negotiators have confirmed that next week’s scheduled Brexit talks have been postponed one week to 25 September, with the aim to give both sides more time to ensure they make progress when they reconvene. The delay adds credence to prior reports that PM Theresa May was preparing to make an “important intervention / speech” on the 21st to kick start the talks. Elsewhere, Chancellor Phillip Hammond noted that the UK is seeking a transitional deal which keeps the “status quo”, where the UK keep its access to the EU single market after it departs. Notably, with the Tory Party conference also due in early October, some form of circuit breaker to the talks is likely required to meet the tight deadlines for an EU summit in October. We shall find out soon.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the July JOLTS report showed the number of job vacancies rose to a new high of 6.17m (vs. 6m expected). Elsewhere, the NFIB small business confidence index remained upbeat and was above market at 105.3 (vs. 104.8 expected). Over in France, the 2Q total payrolls was a tad lower at 0.3% qoq (vs. 0.4% expected) and Italy’s 2Q unemployment rate came in at 11.2% (vs. 11.3% expected).

Looking at the day ahead, the final reading on Germany’s August inflation will be out early in the morning (0.2% mom and 1.8% yoy expected). Then the Eurozone’s July IP and 2Q employment stats are due. Elsewhere, over in the UK, the ILO unemployment rate for July (4.4% expected), claimant count rate and jobless claims change stats are due. In the US, the PPI for August (2.1% yoy for core expected), monthly budget statement and MBA mortgage applications stats are also due. Onto other events, the EU Commission President Jean-Claude Juncker will deliver the state of the union address in France.

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Submitted by Bill Blain of Mint Parnters

Austria 2% for 100 year bond will go down as “financial moment”. Wake up and smell the coffee of economic reality

Blain’s Morning Porridge – September 13th 2017

“Hey Satan, paid my dues, playing in a rocking band…”

This morning dawns bright and hopeful. After the Caribbean hurricanes, London survived a storm last night which ruffled the waters of the Thames, and caused some mild distress in terms of leaves blown off trees. Do your worst Mother Nature! England is ready!

Markets are enthused, boosted by talk of a US tax-reform roadshow, stock markets hitting new highs because the Norte Koreans haven’t found a match to light the fuse on their next firework, and Apple looking likely to get away with pushing the price of a new bright shinny thing past $1000.

I read a great line yesterday I suspect someone is going to ultimately regret: “We have solid global growth and some of the easiest financial conditions in history… hooray!”

It’s probably true we have ridiculously easy conditions – but playing it won’t be easy and I doubt there will be much to cheer as the unintended consequences of financial asset inflation play out! More about that below.

Or how about reading Goldman Sachs saying there won’t be a Global Stock Crash because “too many people expect it..” (Oh, yes they said it – months after I did!) It’s such an obvious triple bluff: Goldman might be saying they don’t expect the crash because they want you to think they do, but you will further out-think them and figure because they are Goldman and are so awfully smart they’ve worked out you would work that out… and they actually want to buy the whole market, or maybe it’s a quadruple bluff… I’m sure you get the gist.

The latest Merrill fund manager survey points out the highest level of investors hedging against a correction in 14 months. Meanwhile, my macro-man Martin Malone points out the market capitalisation of global equities now stands at 101% of Global GDP. At the time of the last correction in 2008 it hit 115%. The Average is around 80%. As we’ve said before. We reckon the smart money is still anticipating a correction – at which point it’s a buying opportunity.

Meanwhile, the story of the day was Austria launching its century bond. Euro 11bln plus of investors looking for a 2% return for a 100 year investment. I have a suspicion “2% for 100 years” may be the moment that defines the very last drink-addled, drug fuelled party days of the bond bull market – but, I’ve been saying that for years already!

However, bond maths always make sense. In bonds there is truth. Marcus Ashworth of Bloomberg sums it up:

“This new 100 year will be the most price-sensitive bond that exists. In any currency.

 

A one basis-point change in yield will move the price of this Austria 2117 issue by 43 cents, or 0.43 percent. That is because the coupon is so low for the ultra-long maturity, which makes the bond’s duration — or sensitivity to yield change — so high.

 

If you wanted to make a bullish bet on European interest rates dropping again, then buying the new Austrian issue will give you the most bang for your euro. Portfolio managers look for such extra sensitivity to enhance the flexibility of their holdings.”

Of course.. if European interest rates go the other way.. perhaps because of normalisation panic – then you probably lose even more quickly as a retreat degenerates into a rout! (Mario Draghi – take note.)

Going back to my original quote about solid growth and easy financial conditions, it’s true: we do have unfeasibly low interest rates (LIRP, ZIRP and NIRP), low inflation, talk about co-ordinated central bank action, recovering economies, full employment in some, and all that good stuff. You can easily argue these are massive positive growth and value drivers.

For the last 10-yrs global central banks have been struggling to generate inflation to bail out the debt crisis. Now we have economies like the UK and UK pretty close to full employment (whatever that is?) and finally we’re getting some tepid inflation from Washington to Beijing. Macro economists are screaming in unconfined joy, almost wetting themselves with the realisation that 1% interest rates and 3% inflation is generating real interest rates of Negative 2%, full employment and making debt burdens sustainable.. Buy Buy Buy!

But, we are equally burdened by nearly 10-years of extraordinary monetary policy. $14 trillion of QE is only part of it – it’s the unintended consequences of that $14 trillion in driving over $200 trillion of financial asset price inflation that matters…

• Bond yields are unreasonably low because of QE, driving false valuations across all asset classes. Fact.
• Corporate, Hi-yield and Emerging Market spreads are unrewardingly tight due to the distorting influences of QE. Fact.
• Stock markets are bid higher by yield tourists, and by the effects of corporates awash with cheap cash indulging in stock buybacks and investing their zero-cost borrowings in inflated financial assets. Fact
• Even Non Financial Alternative assets are out of sync. Top end property prices no longer make any sense – yields from core London 2 bed flats (average price of £2.5mm) are less than 2%. Prime London (£1 mm ave small flat price) barely test 3%. (UK house priced up 5.6% last year – but not so much in London) Facts.
• Alternatives like Wind Farms are now yielding a fraction of what they did just a few years ago – although at least that’s a product of bigger, better and more efficient and proper management..

In short… it looks like full employment, rising inflation and signs of growth are going to force normalization, at which point the bond music stops and we all realise financial assets have been dancing naked in the Emperor’s New Clothes lap-dancing bar as the proverbial tide goes out! 

As I said last week, that’s a prospect that must terrify Draghi and other central bankers. He needs this to keep going on long enough for real recovery to overtake the prospects of a correction.

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Authored by Dave Forest via OilPrice.com,

One of the biggest energy stories this year has been Russia’s Rosneft buying India’s Essar Oil – giving the Russian company a firm grip on one of the world’s biggest emerging oil and gas markets. 

And this past week, that story got more complex. With Rosneft striking another big deal — drawing in another heavyweight energy nation. 

China. 

Rosneft announced Friday it is selling a significant chunk of its equity to Chinese investors. In this case, little-known exploration and production firm CEFC China Energy. 

Although few investors know CEFC, the company is bringing significant capital to the deal. With the firm agreeing to pay $9 billion to acquire a 14.16 percent stake in Rosneft. 

The deal is historic in being the first major buy-in by China into the Russian oil and gas sector (although Chinese firms have been involved in financing LNG export projects in the Russian Arctic).

Showing the strength of the ever-growing ties between Russia and China in the energy space. 

Rosneft and CEFC have been at the center of that burgeoning relationship. With the two companies having signed a deal this past September for long-term supply of Russian crude into China. 

This week’s equity purchase further cements those business ties. And shows that China sees Russia as a critical ally in the energy game going forward.

But there are implications well beyond these two countries. With China now having backdoor access into markets like India — through Rosneft’s recently-acquired holdings in that country. 

That’s a critical development for the world energy picture. Given that Chinese companies haven’t directly gained much access into India — despite the nation being one of the most important emerging players on the energy stage. 

Ownership in Rosneft could help change that. And could open up opportunities in other parts of the world — with Rosneft currently having operations in places ranging from Egypt to Brazil to Venezuela. 

An intriguing side note to the story: CEFC is buying the Rosneft stake from Glencore, and Qatar’s sovereign wealth fund. Who reportedly purchased the interest just nine months ago — for $12 billion.

That means these holders are taking a 25% loss on the sale, less than a year after buying in. But in the meantime, Glencore was able to strike a lucrative deal to trade Rosneft’s Russian crude — probably making up for the losses on the Rosneft equity, and then some. 

All of which shows just how complex things are in this rapidly-changing corner of the energy world. Watch for more China-Russia energy deals — and emerging influence from these two energy superpowers in other key markets like India.

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Having warned in the past that "the system is dangerously unacnhored," former chief economist of the Bank for International Settlements, William White, told Bloomberg TV overnight that the current situation "looks very similar to 2008," adding that OECD sees "more dangers" today than in 2007.

The chairman of Economic and Development Review Committee at OECD, warned that prices are very high – in particular for high yield assets, VIX is very low, house prices are rising strongly, equity markets rising, and all these are a source of concern.

Additionally, White noted:

• India’s debt problems go back a long way, and there are significant governance issues, including at state-owned banks.
• China’s debt situation isn’t a lot different to India’s, but the acceleration of loans and credit growth in China is very fast
• It’s not just the debt level in China that is worrisome, but the speed that it’s accumulating; maybe some of these loans won’t be repaid or serviced.
• We don’t have a liquidity problem that central banks can solve – if we have too much debt, we have a debt resolution or insolvency problem and only governments can address problems like that.
• World needs more fiscal expansion, structural reforms, and also have to look closely at debt write-off some of it and maybe recapitalize financial institutions.
• We have got the mix of income that goes to capital versus labor wrong in many countries, and we need to look at that.
• Central bank tightening is inevitable, but have to be careful.

As White concluded previously,

"it is every man for himself. And we do not know what the long-term consequences of this will be,"

and it appears to be getting worse.

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Authored by Giulio Meotti via The Gatestone Institute,

• Turkey controls 900 mosques in Germany and feels free to say that a "liberal mosque" in Germany is "incompatible" with Islam.
• Can you imagine Germany offering Iraq, Syria and Egypt to build "200 new churches" to reconstruct the derelict and dispossessed Christian communities there? No, because in the Middle East, Christians have been eradicated in a forced de-Christianization.
• Christians in Germany will become a minority in the next 20 years, according to Die Welt.
• We risk losing not only our churches, but more importantly, our cultural strength and even confidence in the values of our own civilization.

Jan Fleischhauer, a journalist of the weekly magazine Der Spiegel, coined an expression to define the free fall of German Christianity: Selbstsäkularisierung ("self-secularization"). Is the Church being liquidated?

The German Bishops' Conference just released the data on the decline of Catholicism in Germany for 2016. In one year, the German Catholic Church lost 162,093 faithful and closed 537 parishes. From 1996 to today, one quarter of the Catholic communities have been closed. "The faith has evaporated," said Cardinal Friedrich Wetter, the Archbishop of Munich and Freising from 1982 to 2007.

Christians in Germany will become a minority in the next 20 years, according to Die Welt. Around 60% of the country is currently Christian, with 24 million Catholics and 23 million Protestants. But that number is falling by 500,000 a year through deaths alone. "Those statistics are embodied by what visitors observe in German cities on Sunday: largely empty churches", the Catholic theologian George Weigel wrote.

German Protestantism is facing the same crisis. Die Zeit revealed that in 2016, 340,000 Protestants passed away, and there were just 180,000 baptisms. Some 190,000 people left the church and just 25,000 people chose to join it.

In his most famous lecture, Pope Benedict XVI famously said that the West, including those who do not accept transcendence, should act "etsi Deus daretur", as if God does exist. The old-fashioned Christian society will never come back, but it is critical for even a secular West to stay based on — and profoundly inspired by — its Judeo-Christian values.

The next stage seems to be a German cultural and religious landscape dominated by atheists and two minority religions: Islam and Christianity. If the secularists do not take Western Christian heritage — or at least the Judeo-Christian values from which it sprang — more seriously and start defending it, both atheists and Christians will soon be dominated by the rising political and supremacist religion, Islam. A prominent Muslim fundamentalist organization in Germany, banned by the federal government, calls itself "The True Religion" ("Die Wahre Religion"). They apparently think they are overtaking Judeo-Christian values.

There are dramatic instances of Christian decay in Germany. In the diocese of Trier, for example, site of the oldest Catholic community and the birthplace of Karl Marx, the number of parishes will drop from 903 to 35 by 2020, according to bishop Stephan Ackermann — a decrease of more than 90%. In the diocese of Essen, more than 200 parishes have been closed; their number has fallen from 259 to 43.

A demographic decline is also involved in this religious crisis. "Christianity is literally dying in Europe," said Conrad Hackett, head of the researchers who drafted a Pew Forum report a few months ago. In Europe, between 2010 and 2015, Christian deaths outnumbered births by nearly 6 million. In Germany alone, there were about 1.4 million more Christian deaths.

This decline also apparent from the recruitment crisis for the priesthood. The official website of the German Catholic Church, noted in May that the dioceses of Osnabrück and Mainz did not receive any new priests this year. The archdiocese of Munich last year drew only one candidate. Throughout the Archdiocese of Munich today, there are only 37 seminarians in the various training stages, for about 1.7 million Catholics. In comparison, the American diocese of Lincoln, Nebraska, currently has 49 seminarians for about 96,000 Catholics. In the U.S., Christianity is strong; in Germany it is literally dying.

A German architect, Joaquim Reinig, told Die Tageszeitung that to integrate Muslim immigrants better, churches should be demolished and replaced with "highly visible mosques". It might sound a bit crazy, but it contains a dramatic truth. In his book The Last Days of Europe, the historian Walter Laqueur wrote that "Germany had some 700 little mosques and prayer rooms in the 1980s, but there are more than 2,500 at the present time". If, in Germany, Christianity is evaporating, Islam is proliferating.

The Turkish-Islamic Union for Religious Affairs (DITIB) just opened a new mega-mosque for worship in the German city of Cologne. The new German mega-mosque has a 1,200-person capacity and the tallest minaret of Europe. According to Deutsche Welle, "Christian leaders bristled at the idea of Cologne's famed Dom cathedral sharing the skyline with minarets". When the mosque was planned in 2007, a citizens' initiative was launched to say that "we want the cathedral here, not minarets". The Muslim authorities then announced the plan to "double" the number of mosques.

The new mega-mosque in Cologne, Germany has a 1,200-person capacity and the tallest minaret of Europe. (Image source: Raimond Spekking/Wikimedia Commons)

The Turkish authorities not only wanted to build a mega-mosque in the city hosting the largest cathedral of Germany, but these also had the sense of irony to commission architect Paul Böhm to design the mosque. Böhm's father and grandfather were in fact the two most radical and admired church architects of their generations. In the "new Germany", nobody had asked Böhm to design a new cathedral.

Since he took power in Turkey, Recep Tayyip Erdogan has built 17,000 Islamic prayer sites there. The Turkish president is committed to the construction of mosques in European capitals as well. Turkey controls 900 mosques in Germany and feels free to say that a "liberal mosque" in Germany is "incompatible" with Islam, according to the daily Frankfurter Allgemeine Zeitung. That is why the 57 percent of Germans fear the rise of Islam in their country.

When Chancellor Angela Merkel opened her country to mass migration in 2014, she apparently did not see any cultural problem in accepting more than another million Muslims.

In the words of Erdogan, however, "Our minarets are our bayonets, our domes are our helmets, our mosques are our barracks". Islamic regimes are, in fact, offering to fill the empty spaces in Germany's religious landscape. Saudi Arabia proposed building 200 new mosques in Germany, "one for every 100 refugees".

Can you imagine Germany offering Iraq, Syria and Egypt to build "200 new churches" to reconstruct the derelict and dispossessed Christian communities there? No, because in the Middle East, Christians have been eradicated in a forced de-Christianization. In Europe, Christians are also becoming extinct by a process of "self-secularization". We risk losing not only our churches, but more importantly, our cultural strength and even confidence in the values of our own civilization.

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