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On Thursday, amid de-escalation chatter, President Trump once again insisted that US military action in North Korea remains a possibility should the North continue its threatening behavior against the US and its allies. If the US were to strike, it would be a “sad day” for the isolated North, Trump promised, adding that while “it would be great” if the issue of containing the North’s nuclear program could be resolved without military action, “nothing is inevitable.” Not peace, not war.

Meanwhile, instead of remorse, Kim Jong Un has only expressed what appears to be frustration that global financial markets aren’t taking his threats more seriously, and has vowed to continue. With its neighbor and client state threatening to upset the global apple cart, China on Thursday hinted that it could support tighter UN economic sanctions, but also pushed the two sides to begin a dialogue. Meanwhile, Russia Today reports that the US military is continuing to prepare for another ground war on the continent. A recent procurement posting suggests that the US Army is seeking a contractor to train its forces in South Korea to respond to potential attacks involving a weapon of mass destruction.

According to a contract proposal posted by the Army on the Federal Business Opportunities website, the Army’s 718th Explosive Ordnance Disposal Company (EOD) in South Korea should be taught to identify hazardous materials, “know how to perform basic control, containment and/or confinement operations,” and implement decontamination procedures.

The contractor would be expected to provide a two-week training course, taught on-site at the US Camp Humphreys base in South Korea. The US has 25,000 troops deployed at some 80 sites across the country. In August, the Pentagon posted another proposal that hinted at heightened anxieties about an attack: Contractors were needed to build walls around four US bases, according to Russia Today.

Trump’s remarks famously followed an aggressive statement from Defense Secretary Jim Mattis, who warned of a “massive military response” to any perceived threat from North Korea to the US or its allies. Carrying on the US’s rhetorical good cop, bad cop routine with the North. Earlier this week, the US began deploying four new THAAD missile-defense systems in Seongju County, located about 300km south of Seoul, adding to the two already there. The South Korean Defense Ministry cited an urgent need to mobilize the launchers amid growing threats from North Korea, despite widespread local protests against the deployment.

The US and South Korea also conducted joint anti-submarine drills on Thursday and Friday, according to Yonhap.

Joining the chorus of voices insisting on a diplomatic solution, Russian President Vladimir Putin said Thursday that a diplomacy could still work – backing away from his previous suggestion that an all-out nuclear conflict was inevitable. However, as the North is probably plotting more missile and nuclear tests, we imagine the US military presence near the DMZ will gradually build as the conflict simmers with no resolution in sight.

But the biggest question facing the Korean crisis is whether, as many have speculated, North Korea will use tomorrow's holiday as a catalyst to launch the next ICBM, a move which Citi recently said would force the US to take military action in retaliation.

via http://ift.tt/2vSvC3A Tyler Durden

Immediately after Israel's latest unprovoked strike on Syria we posed the question, did Benjamin Netanyahu just panic? The answer is yes, Israel is now acting from a position of desperation as it has failed in its goal of regime change in Syria. Overnight (Wed. evening/Thursday early morning), Israel attacked a Syrian military base near the town of Masyaf at about 3:00 a.m. which Syria has now confirmed in a statement that warns of "serious repercussions". Syria reported two troop deaths in the attack. It appears to have been a massive strike – grainy photos show a large fireball lighting up the night sky outside of Masyaf.

Israel appears to have timed its attack to occur on the very night a controversial U.N. report was released earlier in the day (Wednesday) which blames the Assad government for using chemical weapons against civilians at Khan Sheikhoun in April. A number of Israeli analysts and media reports purport the Masyaf base to be a site for chemical and non-conventional weapons storage (such as "barrel bombs") while claiming the attack was motivated by "humanitarian" concern for Syrian civilians.

First image produced from Israeli strike on Al-Tala'i facility near Masyaf. Via Twitter.

But this is the reason for Israeli media and defense officials quickly claiming that the strike at Masyaf was on a chemical weapons facility: they know the "humanitarian" angle sells in the West, especially when coupled with allegations of civilians being gassed. Currently, this is putting the dubious and contested claim that the Syrian government attacked Khan Sheikhoun with sarin gas back in the spotlight at a time when Israel is eager to sell war for regime change while casting its actions in terms of protecting and defending civilians from a brutal dictator. In typical fashion the big newsrooms, which rarely report from inside Syria but instead opt for the comfort of Beirut, are uncritically echoing the "humanitarian airstrike" narrative. The New York Times, in a report filed from Jerusalem, narrates the attack as follows while relying on unnamed "former Israeli officials" and a single Syrian pro-opposition outlet:

Israeli officials did not comment on the strike, but a Syrian monitoring group and two former Israeli officials said it had targeted an installation of a government agency that produced chemical weapons and a military base that produced advanced missiles.

 

The strike came a day after a United Nations commission accused the Syrian government of using chemical weapons in an attack in April that killed dozens in the town of Khan Sheikhoun and flooded clinics with victims gasping for breath.

Initially some Syria observers questioned how the Israeli Air Force could strike so deep inside Syria with no response from the country's advanced Russian made S-400 anti-aircraft system. But it appears Syrian airspace was never violated as the Israeli jets reportedly fired from over Lebanon. Masyaf lies west of Hama and just north of the Lebanese border. While Israel's incursion into sovereign Lebanese airspace is illegal according to international law, Lebanon cannot respond as it has no air force nor does it possess adequate anti-aircraft missiles.

Close-up of the Israeli airstrike aftermath. Image source: Al-Masdar News

It is further significant that Israel chose to fire from over Lebanon (not for the first time) even though it has routinely violated Syrian air space in previous attacks. It appears that Israel calculated it's strike position to be in the vicinity of Russian military presence yet without forcing a Russian response by directly violating air space. The attack comes just over two weeks after Israeli Prime Minister Benjamin Netanyahu met with Vladimir Putin in Sochi. By many accounts the meeting was contentious as Netanyahu warned Putin that Israel would not tolerate Iranian presence in Syria. It was further revealed that a senior Israeli official accompanying Netanyahu on the trip threatened to assassinate Syrian President Assad by bombing his palace in Damascus, while further adding that Israel will seek to derail the US-Russia brokered de-escalation deal reached in Astana, Kazakhstan earlier this summer.

Russia’s Pravda described a frantic and upset Netanyahu at the Sochi talks with the following: “according to eyewitnesses of the open part of the talks, the Israeli prime minister was too emotional and at times even close to panic. He described a picture of the apocalypse to the Russian president that the world may see, if no efforts are taken to contain Iran, which, as Netanyahu believes, is determined to destroy Israel.”

At first glance it does appear that Netanyahu is now making good on his threats, but is this latest flagrant aggression against Syria a sign of more attacks to come? Will Netanyahu pursue escalation in the hope of dragging the US and other allies into war? It's not likely. Realistically that possibility ended when Syria retook Aleppo and with the US-Russia Astana 'de-escalation' deal which tacitly legitimized Iranian presence in Syria. Even some within the pro-opposition regime change crowd took to social media after the strike to say "too little, too late".  Simply put, Israel lost the covert war and is now left "holding the bag" while its more powerful allies pull out of the full push for regime change.

But what is clear is that Israel remains deeply uncomfortable with the Syrian Army's overwhelming momentum of late (just this week the army initiated the liberation of Deir Ezzor from ISIS) and seeks to keep the fires burning in Syria, at least enough to bog down Assad and Iran. Worse for Netanyahu, Hezbollah seems stronger than ever, along with the so-called 'resistance axis' that stretches from Tehran to South Lebanon.

Israeli officials have gone so far as to declare their preference for Islamic State terrorists on their border rather than allies of Iran. But as we've repeatedly pointed out, Israel is acting from a position of weakness and desperation. All that Netanyahu can hope for now is that an Israeli provocation leads to a direct Syrian military response, but it appears that Assad is not taking the bait.

In 2013 when Israel launched a massive missile attack against a Syrian defense technology facility in Jamraya outside of Damascus, it claimed to be attacking a parked Hezbollah weapons convoy. Perhaps more brazen was the 2016 attack targeting Damascus International Airport, which killed a well-known Hezbollah commander. And in a significant admission earlier this month, the head of Israel's air force acknowledged nearly one hundred IDF attacks on convoys inside Syria over the course of the past 5 years.

Netanyahu himself was recently caught on a hot mic bragging that Israel had struck Syrian targets at least "a dozen times". And this is to say nothing of Israel's covert support to al-Qaeda linked groups in Syria's south, which has reportedly involved weapons transfers and treatment of wounded jihadists in Israeli hospitals, the latter which was widely promoted in photo ops involving Netanyahu himself. As even former Acting Director of the CIA Michael Morell once directly told the Israeli public, Israel's "dangerous game" in Syria consists in getting in bed with al-Qaeda in order to fight Shia Iran.

Indeed Assad has not taken the bait for years now. While pro-government Syrians have themselves at times complained about Israel's seeming ability to strike inside sovereign Syrian territory with impunity, Assad has the long-game in mind of "survival now, retaliation later". It was clear from the start that Israel's attacks on largely non-strategic targets were more about provocation: should Damascus lob missiles back in Israel's direction Netanyahu would launch an all-out assault while Syria was at its weakest in the midst of a grinding and externally funded al-Qaeda insurgency.

Israel has also been careful to frame its actions in terms of counter-terror strikes on Hezbollah targets for the sake of maintaining an air of legitimacy to its aggression. But as the Astana agreement demonstrates (a strategic victory for Russia-Iran-Syria),  Syria's ability to absorb Israel's repeat provocations seems to be part of a strategic "waiting game" born of an accurate self assessment of past and current vulnerabilities. As The Century Foundation concludes:

Syria’s contemporary leaders seem to have adopted a simplified version of the “long breath strategy” of the former president—and father of Syria’s current leader—Hafez al Assad. This strategy was named for Syria’s ability to draw a deep breath and weather short-term pain and setbacks in pursuit of a better deal.

And this strategy seems to be working, resulting in a shift in perspective which is even beginning to permeate at least part of the Israeli defense establishment: 

A formerly very high-placed source in Israel’s security system spoke to Al-Monitor last week. He said on condition of anonymity, “It’s high time to admit that perhaps all our assessments were erroneous. The prevailing consensus of the last five years was that Syria will never return to its former state. We thought that however this turns out, the Syrian state as we knew it had passed from the world. But evidently we were wrong.”

 

Israel’s top decision-makers have not changed course, but it is likely that such arguments are heard in private discussions, and top-secret intelligence assessments see it as a real possibility that Assad is capable of outsmarting those who prematurely eulogized him and Syria as we knew it.

 

“Syria is returning, that is clear now,” said the source. “It’s not about the quantity of territory, it’s about central rule. If nothing unexpected happens, in the near future, Assad will be declared the final, unequivocal winner of this war. Following that, the path to Syria’s rebuilding and reconstruction will be short.”

Concerning Israel's adventurist military action this week, contrary to the claims of unnamed "Israeli officials" who say the latest attack was against a branch of Syria's Scientific Studies and Research Center (SSRC), it is likely that this week's air strike was yet another "routine" attack on a Hezbollah weapons depot.

Wrong: It was a Hezbollah/Iran warehouse. Russia won't take part of Israel-Hez struggle and the action is not newhttps://t.co/f2w8LHiNIF

— Elijah J. Magnier (@ejmalrai) September 7, 2017

According to Elijah Magnier – a veteran Kuwait-based Middle East journalist, fluent Arabic speaker, and one who reports from on the ground in Syria (and has done so for years) – Israel in truth hit another Hezbollah weapons storehouse (not a chemical weapons production facility). But with renewed claims that Syrian government possesses and has used sarin gas, Israel is seeking to maximize the propaganda value of the strike. After all, the world's attention now seems far away from Syria and the Israeli gloves are off. Israel will do and say whatever it can to get the wheels of internationally backed regime change in motion again.

via http://ift.tt/2gQwhvC Tyler Durden

European stocks dropped, Asian and EM market rose, and S&P were lower by 0.3% as investors assessed the latest overnight carnage in the USD which plunged to the lowest level since the start of 2015, sending the USDJPY tumbling to 107, the euro extending gains to just shy of $1.21 and a slowdown in China’s export growth which however did not prevent the Yuan from posting its best weekly gain on record.

It was all about the seemingly huge currency moves overnight as the dollar plunged for the 7th day in a row, the biggest 7 day drop in 4 months, amid doubts about further Federal Reserve tightening, North Korea tensions and as Hurricane Irma threatens South Florida.  The Yen rose to the strongest level against the dollar since Nov. amid nervousness about possible provocation from North Korea ahead of its foundation day on Saturday; yen surged past 108 per dollar as options barriers gave way, triggering a series of stop-losses. The Yuan rallied toward 6.45/USD in both onshore and offshore markets as traders speculate PBOC will tolerate a stronger currency after it rose past the psychological 6.50 mark Thursday. The Australian dollar surged to the highest in more than two years on the back of dollar weakness while the cherry on top was the 10Y TSY yield touching a YTD low of 2.014% before rebounding to ~2.035%.

Meanwhile, natural disasters were aplenty, including the most powerful earthquake this century to shake Mexico, while Hurricane Irma is projected to hit Florida Sunday, and North Korea is widely expected to launch an ICBM on its September 9 holiday.

As reported last night, the big overnight story was the dramatic plunge in the dollar in Asian trading….

… which also pushed the EURUSD to the highest level since January 2015, a move that was not helped by this morning’s Reuters “trial balloon” according to which the ECB was considering 4 QE reducing scenarios.

“At its current level, the Euro is not a threat for the Eurozone,” Philippe Ithurbide, global head of research at Amundi Asset Management, said in a report. “If the euro stabilizes, or continues a gradual appreciation path as in our base scenario, the ECB could announce — maybe in October — a reduction, starting in January 2018, of the quantitative easing program. Should the euro continue to appreciate rapidly, the ECB could become more dovish and postpone its tapering.”

This morning, the USD has attempted to stabilize after said heavy selling in Asian session, which has seen the DXY hit a fresh YTD low. Meanwhile, the USD/CNH has bounced from levels last seen in Dec. 2015 after reports of Chinese concerns on yuan strength. The Yuan was set for its best weekly gain since records began in 2007. The onshore yuan headed for the third weekly advance in a row, with a gauge of the dollar tumbling toward the biggest decline since May. The CNY climbed 0.48% to 6.4543 per dollar as of 5:11 p.m. in Shanghai on Friday; extending the weekly advance to 1.6%, the most since Bloomberg began compiling CFETS data in 2007.  On Friday morning, the PBOC strengthened the daily reference rate by 0.36% to 6.5032 per dollar, extending the 10-day run of increases to 2.4%.  The Bloomberg replica of CFETS index, which tracks the yuan against 24 currencies, climbs 0.10% to 95.16

The Yuan’s recent appreciation has been bigger than expected – and it’s also more than what can be explained by the dollar’s moves – which is likely driven by strong corporate dollar selling and positive market sentiment, UBS economist Wang Tao writes in report sent Friday. “Allowing the yuan to gain versus the basket is a step toward convincing the market of increased two-way flexibility; not expecting it to embark on a multi-year appreciation path in effective term” Wang adeded. 

According to Reuters, China policy makers are increasingly worried a sharp CNY rally could hurt exports and the economy, however China is unlikely to intervene forcefully to cap the CNY due to worries of criticism from the US.

Overnight, NY Fed president Bill Dudley became the latest U.S. central banker to lay out his views ahead of a policy-setting meeting later this month as expectations for an interest-rate increase have been scaled back. According to Bloomberg, Dudley reiterated the need to continue raising rates while conceding that the Fed may have to rethink its inflation model.

USD/JPY holds close to overnight levels after tripping downside stops through 108.00. As noted earlier, Bund futures sell off after latest ECB sources give more details on potential tapering, curve steepens. Treasurys partially retrace overnight spike higher, precipitated by the USD weakness. 

In equities, European equity markets open lower and slowly grind back to unchanged led by bank sector, Santander +2.5% after being upgraded at Morgan Stanley. Mining sector underperforms after base metals sell off  aggressively in response to China trade data. Stocks in Europe struggled for traction as the euro extended its march above $1.20, while S&P 500 index futures dropped. The most powerful earthquake this century shook Mexico, adding to investor anxiety.

Asia equity markets traded mixed following similar indecisiveness in US and as the region digested a slew of economic releases including Japanese GDP and Chinese Trade data. ASX 200 and Nikkei 225 were lower as financials mirrored the underperformance in their US peers, with Japan also dampened by a weaker than expected Final Q2 GDP which showed the largest downward revision since the current accounting method began in 2010. Shanghai Comp. and Hang Seng were positive despite another OMO skip by the PBoC which resulted to a larger net weekly liquidity drain W/W, as strength in property and energy names kept sentiment upbeat while traders mulled over the release of mixed Chinese Data. China released its latest trade balance data which showed that Exports missed, but Imports surpassed expectations to suggest strong domestic demand. Exports growth for China moderated to 5.5% yoy in August from 7.2% yoy in July, below expectations, while imports growth was up to 13.3% yoy from 11.0% yoy in July, above consensus. In sequential terms, exports contracted by 0.4% mom sa, albeit less than that in July ( -2.0% mom sa). Imports increased by 2.9% mom sa, rebounding from -1.9% mom sa in July. The trade surplus moderated to US$42.0bn from US$46.7bn in July

• Chinese Trade Balance (CNY)(Aug) M/M 286.5B vs. Exp. 335.7B (Prev. 321.2B)
• Chinese Exports (CNY)(Aug) Y/Y 6.90% vs. Exp. 8.70% (Prev. 11.20%)
• Chinese Imports (CNY)(Aug) Y/Y 14.40% vs. Exp. 11.70% (Prev. 14.70%)

Meanwhile, the threat from North Korea lingers. U.S. President Donald Trump said it’s not “inevitable” that the U.S. will wind up in a war with North Korea over its continued development of nuclear weapons, though military action remains an option. Pyongyang may test a missile this weekend to coincide with its “founding day” on Sept. 9.

Ten-year Treasury yields fell toward 2 percent and gold headed for a third week of advance ahead of a potential North Korean missile launch. Copper led most industrial metals lower and crude oil dropped. The yield on 10-year Treasuries declined less than one basis point to 2.04 percent, the lowest in 10 months. Britain’s 10-year yield advanced one basis point to 0.982 percent.

West Texas Intermediate crude fell 0.4 percent to $48.91 a barrel, the largest fall in more than a week. Gold gained 0.2 percent to $1,351.25 an ounce, the strongest in almost 13 months. Copper declined 1.4 percent to $6,802.00 per metric ton, the lowest in more than a week on the largest drop in more than four months.

Economic data include wholesale inventories.

Market Snapshot

• S&P 500 futures down 0.4% to 2,455.75
• STOXX Europe 600 down 0.2% to 374.04
• German 10Y yield fell 1.3 bps to 0.294%
• MSCI Asia up 0.4% to 161.82
• MSCI Asia ex Japan up 0.4% to 534.48
• Nikkei down 0.6% to 19,274.82
• Topix down 0.3% to 1,593.54
• Hang Seng Index up 0.5% to 27,668.47
• Shanghai Composite down 0.01% to 3,365.24
• Sensex up 0.03% to 31,671.21
• Australia S&P/ASX 200 down 0.3% to 5,672.62
• Kospi down 0.1% to 2,343.72
• Euro up 0.2% to $1.2046
• Italian 10Y yield fell 10.2 bps to 1.634%
• Spanish 10Y yield rose 1.6 bps to 1.511%
• Brent Futures up 0.5% to $54.76/bbl
• Gold spot up 0.4% to $1,354.10
• U.S. Dollar Index down 0.4% to 91.27

Top Overnight News

• Reuters: ECB discussed scenarios yesterday and agreed the next step is to cut stimulus but should be done with broadest possible consensus; options included reduction to EU20b or EU40b and extension by 6 or 9 months, according to people familiar; ECB’s Liikanen: Some QE decisions will be taken in December
• Fed’s Dudley: Appropriate to continue to remove monetary policy accommodation gradually, low inflation may be structural; Fed’s George says it’s time to continue with Fed rate hikes
• President Donald Trump said it’s not “inevitable” that the U.S. will wind up in a war with North Korea over its continued development of nuclear weapons, but that military action remains an option
• Trump suffered another setback on his travel ban, with an appeals panel leaving in place a lower-court ruling that forces the administration to accept people with grandparents, cousins and other relatives in the U.S.
• Traders braced for economic damage to Florida from Hurricane Irma, set to make landfall on Sunday. The most powerful earthquake this century shook Mexico, adding to investor anxiety and sending the peso weaker
• Federal Reserve Bank of New York President William Dudley reiterated the need to continue raising interest rates while conceding that the U.S. central bank’s inflation model may be in for a rethink soon
• White House is considering at least six candidates to be the next head of the Fed; a chance Yellen will be renominated, though Cohn’s prospects have dimmed according to people familiar
• Chinese officials are beginning to worry about the rallying yuan due to the strain on exporters, according to people familiar: Reuters
• China Aug. Trade Balance: +$41.9b vs +$48.5b est; Exports 5.5% vs 6.0% est; Imports 13.3% vs 10.0% est.
  
• Delta Cancels Flights for South Florida Airports on Irma
• Strongest Quake in Century Hits Mexico, at Least Three Dead
• White House Is Said to Be Considering at Least Six for Fed Chair
• Equifax’s Historic Hack May Have Exposed Almost Half of U.S.
• U.S. Is Said to Target North Korea Violators, With ZTE’s Help
• BlackRock Is Said to Be in Talks for Calpers’s Buyout Business
• ECB Is Said to Study QE Options That Don’t Need Rule Tweaks
• Apple-Backed Billionaire Makes Case to Buy Toshiba Chip Unit
• China’s Export Engine Slows as Imports Maintain Steady Gains

Asia equity markets traded mixed following similar indecisiveness in US and as the region digested a slew of economic releases including Japanese GDP and Chinese Trade data. ASX 200 and Nikkei 225 were lower as financials mirrored the underperformance in their US peers, with Japan also dampened by a weaker than expected Final Q2 GDP which showed the largest downward revision since the current accounting method began in 2010. Shanghai Comp. and Hang Seng were positive despite another OMO skip by the PBoC which resulted to a larger net weekly liquidity drain W/W, as strength in property and energy names kept sentiment upbeat while participants also mulled over the release of mixed Chinese Data where Trade Balance and Exports missed, but Imports surpassed expectations to suggest strong domestic demand. 10yr JGBs gained amid the risk averse sentiment in Japan and as yields tracked the declines seen in their US counterparts, while the BoJ were also present in the market for a total of JPY 880bln of JGBs across the curve.  China policy makers worry a sharp CNY rally could hurt exports and the economy; China unlikely to intervene forcefully to cap the CNY due to worries of criticism from the US, according to sources.

Top Asian News

• Tencent’s Giant Rally Is a Problem for Some China Investors
• SpiceJet Shows Long-Haul Intent With Boeing-Airbus Contest
• Japan’s GDP Growth Revised Down on Softer Capital Expenditure
• Citi Sees Pressure on Yuan, Philippines Peso Amid Reserves Trend
• China No. 4 Developer Seeks to Repay Overdue Debt at Lower Rate
• Topix Has Worst Week Since April on N. Korea, Natural Disasters
• Yuan Surge Feeds Speculation Policy Makers to Loosen Control

Soft risk off tone has highlighted this lacklustre Friday morning, as much of the price action was seen yesterday. Equity markets
opened marginally lower and have traded around these levels from the open with 8/10 Euro Stoxx sectors trading in the red. The
stronger EUR has supported the mild risk-off tone following yesterday’s ECB meeting and the EUR continuing to ramp.
Stock specific sees basic resources struggling, being affected by the pressure of copper prices, elsewhere the finance sector is one
to trade in the marginal green, buoyed by Morgan Stanley’s upgrade of Santander. Peripheral bonds are seeing slight downward pressure, likely due to profit taking following yesterday’s outperformance amid the
ECB press conference. Price action across European curves has been quiet, as the EU AAAs all trade around levels seen in the
open.

Top European News

• U.K. Manufacturing Jumps, Construction Falls as Quarter Starts
• Akzo Nobel Warns on 2017 Profit as Paintmaker Replaces CFO
• Nordea Move Has Riksbank Chief Warning of Dangerous Fallout
• Swedish Government Backs Away From Plan to Cut Riksbank Reserves
• Overlooked in Cancer, Glaxo and Sanofi Look to Get Into the Race
• Greene King Shares Slump on Trading Update, Dragging Pubs Lower
• Mercedes Fields Buzz Aldrin to Take on BMW While Fiat Stays Home
• Trinity Mirror Starts Talks to Buy Desmond’s U.K. Tabloids
• Germany’s Facebook Case Tackles Crucial Digital Issues: Mundt

FX markets have seen subdued trade following yesterday’s volatility being followed by an attack on the greenback overnight. Much anticipation was on the UK Manufacturing and Industrial Production data, the formers slight beat vs. expected sparked little sterling buying, with the data causing no real price action. USD/JPY broke through the 108 handle during the Asia/European crossover, knocking through option barriers on the way through. The week’s aggressive buying between 108.00/108.50 has aided with the bearish pressure, as stops were triggered through the 108.00 level, now firmly through April’s low. July 16, 2016 high has paved some support for the pair, however, a break through 107.50 is likely to see a 105 print.

In commodities, the US storms remain a concern to energy traders, the catastrophic events are likely to lead to refiners and recovery projects competing for the same labour, in turn driving up costs or causing labour shortages. Brent futures have flipped back into its pre-hurricane backwardation after fears of a significant drop in crude demand failed to leak into markets. Copper has been the noticeable laggard in metal markets, as the precious metals all perform well amid the risk-off tone.

Looking at the day ahead, there is the final reading for wholesale inventories
along with consumer credit data. Away from the data, the Philadelphia
Fed President Harker will speak on consumer behaviour in credit.

US Event Calendar

• 8:45am: Fed’s Harker Speaks on Consumer Finance in Philadelphia
• 10am: Wholesale Inventories MoM, est. 0.4%, prior 0.4%; Wholesale Trade Sales MoM, est. 0.5%, prior 0.7%
• 3pm: Consumer Credit, est. $15.0b, prior $12.4b

DB’s Jim Reid concludes the overnight wrap

So unsurprisingly the talk of the town over the past 24 hours has been the ECB and President Draghi. As expected there was no change to policy but that was never going to be the talking point. Draghi did however more or less confirm that a decision on tapering will likely be taken at the October meeting. A “very, very preliminary discussion” was said to have taken place within the governing council yesterday but the “bulk of decisions” will be made in October for beyond 2017 according to the President.

The biggest focus going into the meeting though was on what sort of rhetoric we would get from Draghi around the recent strength in the currency. While questioned and addressed at least half a dozen times, the general feeling was that Draghi felt relatively comfortable suggesting that he and the council view Euro strength as a sign of improving economic fundamentals. That gave the green light for the single currency to rally another +0.89% yesterday and so close above 1.200 for the first time since January 2015. This morning it’s up further, at 1.2070 as we go to print. The President did yesterday highlight up front that “the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring” along with making various other references. However Draghi also played up growth and failed to really downplay inflation. Draghi called growth “robust” and “broad based” and signalled that the ECB had upgraded this year’s growth forecast to 2.2% from 1.9%. 2018 and 2019 forecasts were left unchanged. On inflation the impact of the recent currency move was to only shade one-tenth off the 2018 and 2019 headline forecasts, and leave 2017 as is at 1.5%. That said core inflation expectations were revised down in 2019 by twotenths. Overall though it felt a bit like every time Draghi tried to downplay the currency he ended up caveating it with a positive.

Away from that, another notable snippet from the press conference included Draghi saying that the ECB “haven’t really discussed the scarcity issue (for bond buying) because so far we’ve consistently shown that we’ve been able to cope with this issue quite successfully”. DB’s Mark Wall summed up in his report by saying that his baseline expectation is a “slow and extend” decision on QE at the October meeting, extending until mid-2018 at the slower rate of EUR40bn per month. He expects a dovish tightening and notes that the ECB could achieve this by justifying slower QE on the basis of partial normalisation of core while saying that full normalisation is susceptible to FX appreciation, and also maintaining the QE guidance by saying that the Bank is prepared to do more if necessary.

The failure to temper the move in the currency resulted in an interesting market dynamic as it essentially cleared the path for European bonds to rally. 10y Bund yields closed -4.1bps lower at 0.302% and the lowest since late June. France and Netherlands were -5.0bps and -4.5bps lower respectively while the periphery outperformed with yields in Italy, Spain and Portugal -11.1bps, -7.3bps and -10.5bps respectively. The Stoxx 600 also rebounded from an early fall to close +0.27%.

Meanwhile across the pond, 10y Treasuries plunged to a new YTD low during the day of 2.032% and are continuing to flirt with that 1% handle. They eventually closed just off that at 2.040% which is where they are this morning. That move for Treasuries appeared to be more European led but clearly the threat of Hurricane Irma (and two other Hurricanes) inching closer to Florida and reports per Bloomberg about another possible missile test by North Korea is keeping the bond market propped up. The cloud hanging over the Fed now with the all the antics in Washington and an uncertain Fed Board composition is clearly not helping too. The S&P 500 closed virtually flat (-0.02%), but within the sectors, health care rose but banks (-1.76%) and insurers (-1.90%) were hit given the potential drags from lower bond yields and Hurricane  Irma respectively. Elsewhere, the US dollar index fell -0.68%, Gold rose +1.12% to a new one-year high but WTI Oil was little changed.

On the topic of uncertainty, the feeling was that it might be a two-horse race between Janet Yellen and Gary Cohn to be the next Fed Chair, but Bloomberg reported last night that Trump may be considering six more possible candidates for the top job. The list is fairly broad and includes: Kevin Warsh (former Fed governor), Glenn Hubbard (professor at Columbia Uni.), John Taylor (professor at Stanford Uni.), Lawrence Lindsey (former economic advisor to President Bush), Richard Davis (former US Bancorp CEO) and John Allison (former CEO of BB&T). With the various other departures on the Board, Trump is going to have a rare opportunity to handpick and reshape the composition of the Federal Reserve. However as we’ve been saying in recent days, this very much keeps the clouds of uncertainty from dissipating over the Fed for a while.

On a related note, following up from the Fed’s Vice-Chair Stanley Fischer’s early resignation the other day, our US team took a closer look at the potential implications. They argue that the FOMC has lost one of its more hawkish members  and with the December FOMC decision already on a course to be contentious, it is possible that there could be at least three dissents to a rate hike decision. 

This morning in Asia, markets are heading into the end of the week a bit mixed. The Nikkei (-0.38%), Kospi (-0.13%) and ASX 200 (-0.36%) are all softer but the Hang Seng (+0.50%) and Shanghai Comp (+0.24%) have edged higher. It’s worth noting that trade data in China this morning showed export growth as slowing to +5.5% yoy in Dollar terms from +7.2%. Expectations were for a slower decline to +6.0%. Imports on the other hand surged to +13.3% yoy from +11.0% after the consensus was also for a slowdown in the growth rate. It’s worth noting that this is the second month in a row that export numbers have disappointed.

Back to the US debt ceiling. Now that the September deadline has been extended to December, President Trump suggested yesterday that there are “a lot of good reasons” to get rid of the debt ceiling altogether. Senate minority leader Schumer and Senate Finance Chairman Hatch along with others supports the idea, but some do not, including House Speaker Paul Ryan who said that “there is a legitimate role for the power of the purse and Article One powers”.

Staying with the US, we’ve had two more Fed speakers in the last 24 hours. The usually hawkish Cleveland’s Fed President Mester said she is “comfortable” raising interest rates again this year and added that not hiking rates between now and March 2018 is not her idea of a gradual rise. Elsewhere, The NY Fed President Dudley said that “I expect the US economy will perform quite well… as this occurs, I anticipate that wage growth will firm and price inflation will gradually rise” and that “we will continue to gradually remove monetary policy accommodation”.

Moving on. The latest on Brexit talks yesterday saw EU Chief Brexit negotiator David Barnier say “I’ve been very disappointed by the UK position…there is a moral dilemma here, you can’t have 27 (states) paying for what was decided by 28” and that “the UK needs to tell us what it wants and we will see what is possible”. Elsewhere, the President of the European Parliament, Antonio Tajani, said “it would seem very difficult that sufficient progress can be achieved by October”. Here in the UK, the Guardian noted that PM May has rejected an invite to address the EU Parliament to explain Britain’s position, instead preferring to discuss with leaders in closed sessions.

Before we take a look at today’s calendar, a quick recap of yesterday’s economic data. In the US, the initial impact of Hurricane Harvey has seen initial jobless claims rise 62k to 298k (vs. 245k expected), with applications in Texas up 52k. Continuing claims were broadly in line at 1,940k (vs. 1,945k expected). Elsewhere, the final reading for nonfarm productivity was above market at +1.5% qoq (vs. +1.3% expected), resulting in a through-year gain of +1.3% yoy.

Back in Europe, the final reading on the Eurozone’s 2Q GDP was unrevised at +0.6% qoq and +2.3% yoy (vs. 2.2% expected). In Germany, July industrial production was flat (vs. +0.5% mom expected), but annual growth is still up +4.0% yoy (vs. +4.6% expected). In the UK, the Halifax house price index was well above market at +1.1% mom (vs. +0.2% expected) and +2.6% yoy (vs. +2.1% expected). Over in France, the trade deficit widened to EUR6.0bn in July, with +4.9% yoy growth in exports outpaced by +9.2% yoy growth in imports.

Looking at the day ahead, Germany’s trade balance, current account balance and export / imports stats are due this morning. For the UK and France, industrial production (+0.2% mom expected for UK; +0.5% mom for France), manufacturing production and trade balance stats are also due. Over in the US, there is the final reading for wholesale inventories along with consumer credit data. Away from the data, the Philadelphia Fed President Harker will speak on consumer behaviour in credit.

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In our concluding comments on the ECB’s disjointed message yesterday, in which Draghi feebly tried to talk down the EUR while talking up the European economy, and also hinting at the start of policy normalization but without actually doing so, in the process sending the EUR shooting higher, we said “And now that the market is supremely confused, we expect the ECB to lob the next Reuters trial balloon any moment to punish all those who keep buying the EUR.”

Less than one day later, this is precisely what happened because just before 5am ET on Friday, the ECB’s “sources” struck again through, guess whom Reuters which reported that contrary to Draghi’s responses during yesterday’s Q&A, the European central bank had discussed four QE scenarios in detail and agreed that the next step is to cut stimulus, to wit:

• ECB POLICY-MAKERS DISCUSSED 4 QE SCENARIOS ON THURSDAY AGREED NEXT STEP IS TO CUT STIMULUS & SHOULD BE DONE WITH BROADEST POSSIBLE CONSENSUS
• ECB QE OPTIONS INCLUDED BUYS AT 40 BILLION EUROS OR 20 BILLION A MONTH; EXTENSION OPTIONS INCLUDE 6 MONTHS OR 9 MONTHS – SOURCES

Ironically, however, the Reuters “post-script” ended up confirming what the EUR bulls knew all too well: the ECB has no choice but to taper QE, and soon, in the process pushing the EUR even higher.

As the ECB’s favorite FX trading news service Reuters details further, “ECB policymakers meeting on Thursday were in broad agreement that their next step will be reducing their bond purchases and discussed four options, two sources with direct knowledge of the discussion said. Possibilities discussed by the ECB included – but are not limited to – cutting assets buys to 40 billion euros a month or 20 billion euros, with extension options including 6 months or 9 months.” 

Per the details, the ECB is merely trying to apply the Fed’s own normalization template to its gargantuan balance sheet:

Although the scenarios included specific monthly volumes and extensions, much of the focus of the discussion was on the overall amount of the purchases. This includes the reinvestment of proceeds from maturing bonds, which will slowly rise towards 15 billion euros per month next year, the sources said.

 

Policymakers also agreed that interest rates will not be raised before the asset buys end, the sources said, indicating by default that any extension of the program would also push out the first rate hike.

Why wait one whole day before unveiling this addendum to Draghi’s press conference? It appears the ECB wanted to see which way the market will turn and how Mario’s words would be digested by the market. Furthermore, the ECB hopes to telegraph a “broad consensus”, which ironically needs a pre-release from a wire service to gauge investor sentiment.

Worried about the euro’s strength, the bank stayed pat on Thursday, honing in on October for the key decision after more than 2 trillion of euros worth of asset buys.

 

The cautious approach raises the chances that the ECB will opt to phase out quantitative easing, designed to boost growth and inflation, only very slowly next year, despite solid economic growth in the euro zone and worries about real estate bubbles in richer countries such as Germany.

Furthermore, as Draghi hinted during the press conference, Reuters “sources” added that the so-called issuer limit, which caps any ECB buying to a third of a country’s outstanding debt, is not up for discussion because it would open the program, already under review by the European Court of Justice, for a legal challenge.

But maintaining the cap and the program’s other self-imposed constraints would limit the purchases as the ECB is already approaching its limit in several countries – notably Germany, the euro zone’s biggest economy and the ECB’s top critic.

And while all of the above was largely expected, if not at all mentioned by Draghi , who was too scared to discuss it during yesterday’s announcement, purchases what is most notably was the ECB’s confirmation that if QE purchases are left unchanged, “Germany could hit the limit in the first half of 2018.” At least it’s good to know that simple math still works at the ECB.

Finally, in terms of market response, judging by the EURUSD, which moved up all of 20 pips on the “news”, the ECB should have just avoided this latest PR fiasco. The reaction was more notable among Bunds, where futures fell, reversing their earlier advance as German debt had opened higher, tracking gains in Treasuries.

 

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Authored by Soeren Kern via The Gatestone Institute,

• The September 6 ruling, which has been hailed as a victory for European federalism, highlights the degree to which the European Union has usurped decision-making powers from its 28 member states. The ruling also showcases how the EU's organs of jurisprudence have become politicized.
• Many so-called asylum seekers have refused to relocate to Central and Eastern Europe because the financial benefits there are not as generous as in France, Germany or Scandinavia.
• "Let us not forget that those arriving have been raised in another religion, and represent a radically different culture. Most of them are not Christians, but Muslims. This is an important question, because Europe and European identity is rooted in Christianity. Is it not worrying in itself that European Christianity is now barely able to keep Europe Christian? If we lose sight of this, the idea of Europe could become a minority interest in its own continent." — Hungarian Prime Minister Viktor Orbán.

The European Union's highest court has rejected a complaint by Hungary and Slovakia over the legality of the bloc's mandatory refugee quota program, which requires EU member states to admit tens of thousands of migrants from Africa, Asia and the Middle East.

The European Court of Justice (ECJ) ruled that the European Commission, the powerful executive arm of the European Union, has the legal right to order EU member states to take in so-called asylum seekers, and, conversely, that EU member states have no legal right to resist those orders.

The September 6 ruling, which has been hailed as a victory for European federalism, highlights the degree to which the European Union has usurped decision-making powers from its 28 member states. The ruling also showcases how the European Union's organs of jurisprudence have become politicized.

Opponents of the relocation scheme say that decisions about the granting of residence permits should be kept at the national level, and that by unilaterally imposing migrant quotas on EU member states, unelected bureaucrats in Brussels are seeking to force the democratically elected leaders of Europe to submit to their diktat.

The dispute dates back to September 2015, when, at the height of Europe's migration crisis, EU member states narrowly voted to relocate 120,000 "refugees" from Italy and Greece to other parts of the bloc. This number was in addition to a July 2015 plan to redistribute 40,000 migrants from Italy and Greece.

Of the 160,000 migrants to be "shared," nine countries in Central and Eastern Europe were ordered to take in around 15,000 migrants. Although the Czech Republic, Hungary, Romania and Slovakia voted against the agreement, they were still required to comply.

Since then, several states have refused to accept their assigned quotas of migrants. Poland, for example, has a quota of 6,182 migrants, not one of whom has been admitted. The Czech Republic has a quota of 2,691 migrants, of whom only 12 have been taken. Hungary has a quota of 1,294, none of whom has been admitted.

In the EU as a whole, so far only around 25,000 migrants have been relocated (7,873 from Italy and 16,803 from Greece), according to the EU's latest relocation and resettlement report, published on July 26, 2017. Of the 28 EU member states, only Latvia and Malta have taken in their full quotas — a combined total of 469 migrants.

Many so-called asylum seekers have refused to relocate to Central and Eastern Europe because the financial benefits there are not as generous as in France, Germany or Scandinavia. Hundreds of migrants who have been relocated to Estonia, Latvia and Lithuania, which rank among the poorest countries in the EU, have since fled to Germany and other wealthier countries in the bloc.

Hungary and Slovakia, backed by Poland, argued that the European Union broke its own rules and exceeded its powers when it approved the quota system with a "qualified majority" — around two thirds of the bloc's members. They also argued that the relocation scheme is a direct violation of the European Union's Dublin Regulation, a law that requires people seeking refuge within the EU to do so in the first European country they reach.

The European Court of Justice ruled that a qualified majority vote was sufficient because the EU "was not required to act unanimously when it adopted the contested decision." The ruling, which did not mention the Dublin Regulation, concluded: "The mechanism actually contributes to enabling Greece and Italy to deal with the impact of the 2015 migration crisis and is proportionate."

Hungarian Foreign Minister Peter Szijjarto called the court ruling "outrageous and irresponsible" and "contrary to the interests of the European nations, including Hungary." He added: "The decision puts at risk the security of all of Europe and the future of all of Europe as well."

 

Szijjarto vowed that Hungary would continue to challenge any attempts by the EU resettle migrants in Hungary without its approval. "The real battle is only just beginning," he said, adding that the decision was political: "Politics has raped European law and values."

 

Slovakian Prime Minister Robert Fico said that while he "respected" the court's decision, his government's opposition to the relocation plan "has not changed at all." He added: "We will continue to work on having solidarity expressed in different ways other than forcing on us migrants from other countries that do not want to be here anyway."

 

Polish Prime Minister Beata Szyd?o also was defiant: "I was convinced that the court would make such a decision, but this absolutely does not change the stance of the Polish government with respect to migration policy."

After the ruling of the European Court of Justice that the EU has the legal right to order member states to take in so-called asylum seekers, and that member states have no right to resist those orders, Polish PM Beata Szyd?o was defiant, saying, "this absolutely does not change the stance of the Polish government with respect to migration policy." (ECJ photo by Transparency International/Flickr; Szyd?o photo by Polish PM Chancellery)

German Foreign Minister Sigmar Gabriel said that the ruling means Eastern European member states must abide by the refugee sharing scheme: "I always said to our Eastern European partners that it is right to clarify questions legally if there is doubt. But now we can expect all European partners to stick to the ruling and implement the agreements without delay."

EU Migration Commissioner Dimitris Avramopoulos welcomed the ECJ ruling: "ECJ confirms relocation scheme valid. Time to work in unity and implement solidarity in full." He warned holdouts of legal action if they do not comply with the refugee obligations "in coming weeks."

The European Commission has already initiated legal action against the Czech Republic, Hungary and Poland for failing to take in their quotas of migrants. The so-called infringement procedure, which authorizes the Commission to sue member states that are considered to be in breach of their obligations under EU law, could lead to massive financial penalties.

The ECJ ruling and the continued threats from Brussels are likely to help Hungarian Prime Minister Victor Orbán in his campaign for re-election in 2018. In a recent opinion survey, Orbán's Fidesz party polled at 53%, followed by the nationalist Jobbik party, at 21%. He has said that his campaign platform would focus on boosting the economy, improving security and preserving national identity.

Orbán, who has emerged as the standard-bearer of European opposition to German Chancellor Angela Merkel's "open-door" migration policy, has repeatedly warned that Muslim migrants are threatening Europe's Christian identity:

"Let us not forget that those arriving have been raised in another religion, and represent a radically different culture. Most of them are not Christians, but Muslims. This is an important question, because Europe and European identity is rooted in Christianity. Is it not worrying in itself that European Christianity is now barely able to keep Europe Christian? If we lose sight of this, the idea of Europe could become a minority interest in its own continent."

At a September 3 campaign rally in the town of Kötcse, Orbán cited expert predictions that more than 60 million people are expected to make their way from Africa into Europe during the next 20 years — thereby pushing Europe's Muslim population to above 20% by 2030. "The Islamization of Europe is real," Orbán warned.

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After reports surfaced last month that President Donald Trump was becoming “frustrated” with his Secretary of State Rex Tillerson, another world leader has expressed regret at honoring the former ExxonMobil CEO. Russian President Vladimir Putin joked during public remarks on Thursday that Tillerson had “fallen in with the wrong company” since being awarded with a Russian state honor for his contribution to Russian-U.S. relations, according to Reuters.

The remark was emblematic of the deterioration in relations between the Trump administration and Putin’s government:

Late last month, the White House ordered the closure of three Russian consulates – purportedly to achieve “parity” between the two countries’ diplomatic missions, saying the missions needed to be closed by Sept. 2. The decision, a response to Russia kicking out dozens of US diplomats earlier in the summer, provoked outrage in Russia.

Addressing a US citizens at a plenary session of an economic forum in Vladivostok, Putin said: “We awarded your compatriot Mr. Tillerson the Order of Friendship, but he seems to have fallen in with the wrong company and to be steering in the other direction,” according to Reuters.

“I hope that the wind of cooperation, friendship and reciprocity will eventually put him on the right path,” Putin added, drawing cheers from the crowd.

Back in 2013, Putin awarded Tillerson, then CEO of Exxon Mobil, the Order of Friendship for his “significant contribution to strengthening cooperation in the energy sector.”

Under Trump, the US has expanded its economic sanctions against Moscow – measures that were passed by Congress over the explicit objections of the administration, which warned that they would imperil a détente between the two world powers. Russia is, of course, still at the center of multiple probes into whether it meddled in the US presidential election. Trump had widely praised Putin during the campaign, saying he wanted to improve ties between Russia and the US to focus on areas of “mutual interest” like fighting ISIS.
 

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Authored by Ryan McMaken via The Mises Institute,

When the US government decides it doesn't like a foreign regime, it's become something of a tradition for US politicians — with the help of a compliant media — to portray those leaders as irrational, unhinged, or even downright insane. 

This was true of Saddam Hussein, and it was true of Slobodan Milosevic. In both cases, a foreign head of state was condemned as irrational in order to help justify US invasions and bombings of foreign nations that were no threat to the United States. 

The US narrative usually goes something like this — as described by Ronnie Lipschutz: 

Why would so-called rogues — and these are the only countries that, according to Washington, threaten US forces, allies, or interests — choose to [threaten the US]? No rational reason can be given, and so irrational ones are offered instead. They hate us, but for no reason since we have no designs on them. They desire vengeance, but for no reason since we have never offended them. They wish to injure us, for for no reason, since they have only been injured through their interference with our pusuit of order. 

This narrative helps to reinforce the credulous American public's naive acceptance of the idea that the US government is an untrammeled force for good in the international sphere, and that any opposition to the US must be based on irrational, evil motives. If any other head of state is angry with the United States, it's simply because he absurdly desires world conquest, or to massacre innocents. Or he may even be insane. 

Why We Must Claim They're Crazy

But there's an even more important motivation behind portraying "rogue" nations as being run by crazy people. It allows advocates for war to claim that deterrence via America's huge nuclear  and conventional arsenals will not work — and thus these leaders present a grave threat to the American public. Lipschutz notes: "if insanity or irrationality are to blame for wars, deterrence cannot work to prevent them."

A rational head of state, of course, would understand that any existential threat to the US could mean total nuclear annihilation for the offender. On the other hand, if the head of state is just insane, then all bets are off. 

It is not surprising, then, that this narrative is being trotted out yet again in the case of North Korea. 

Nuclear deterrence may have worked against Joseph Stalin — who apparently was a super-reasonable and level-headed guy — but Kim Jong-un is just crazy.

Naturally, ultra-hawk John McCain has been at the forefront of this rhetorical effort, calling Kim Jong-un a "crazy fat kid." Later, McCain's daughter got in on the act, calling Kim a "total absolute maniac." 

These attempts at portraying Kim as immune to deterrence are so common, in fact, that Isaac Fish from Foreign Policy magazine has declared "there is widespread belief in the US that North Korea is so hard to deal with because Kim is insane." Fish, on the other hand, concludes Kim has understandable motives just like most everyone else. 

Certainly, in social media, it's not uncommon to encounter pro-war commenters who insist — without proffering any evidence — that Kim is simply impervious to nuclear deterrence, and thus must be killed (along with millions of other North Koreans) in a pre-emptive nuclear holocaust. 

Kim is Sane — and Predictable

Those who have actually bothered to study Kim and his regime, however, often take a rather more moderate position. 

Charles Peña begins with the obvious question and provides the obvious answer: "But isn’t Kim Jong-un an unpredictable—even crazy—leader who can’t be deterred? The same was said of Stalin and Mao in their time, yet both those leaders were deterred. Moreover, Kim Jong-un would have to be suicidal to launch a nuclear weapon against the United States since the United States has the ability to retaliate with utter devastation."

David C. Kang also concludes: "Kim Jong-un may be many things, but he is not suicidal. Deterrence will continue to work." 

Contrary to the idea that Kim and the North Koreans are crazed loose cannons, the North Koreans behave exactly as any other regime bent on maintaining its regime. Far from seeking to die in a blaze of glory, Kim wants to go on living as a dictator indefinitely.

As Peña notes, Kim wants "to secure his own survival and that of his regime, much like his father and his father’s father before him. That would certainly explain the executions and assassinations of those who might usurp him, which include family members."

The regime wants to survive — and not be a victim of "regime change" which is exactly why, as Kang writes, "North Korea isn’t unpredictable; rather, it is the most predictable country on earth."

Even Secretary of State Rex Tillerson — perhaps the most reasonable person on Trump's foreign policy team — admits "He may be ruthless. He may be a murderer. He may be someone who in many respects we would say by our standards is irrational. But he is not insane." 

It's Rational to Want Nuclear Weapons

But why would the regime want nuclear weapons if not to use them? Kim wants nukes as protection against "regime change" imposed by the US, since, as Pena notes, "Having nuclear weapons would seem to be an effective deterrent against regime change. After all, other dictatorial leaders who gave up their weapons programs—such as Iraq’s Saddam Hussein and Libya’s Muammar el-Qaddafi—paid a high price for those decisions."

Jacob Hornberger has explained how Fidel Castro was one of the first to figure out the need for nuclear weapons as protection against American-sponsored regime change: "[Cuba's success in the Cuban Missile Crisis] showed that if an independent, recalcitrant Third World regime wants to protect itself from a US national-security-state regime-change operation, the best thing it can do is secure nuclear weapons."

Thus, North Korea's behavior in this regard has been utterly predictable, rational, and what we would expect from a head of state in his position. 

Kim understands nuclear deterrence perfectly well. He knows that it is the only thing that works against the US's plans for yet another regime change operation. 

However, in order to justify a first-strike nuclear war or a pre-emptive war against the North Koreans, the John McCains of the world must convince the world that Kim is simply insane and is not subject to deterrence. 

North Korea Is Not Unique

This "he's crazy!" strategy is then mixed with endless ominous news reports about what new missile Kim's regime is testing this week, and just how many nuclear warheads he may or may not have. Indeed, the evidence is rather spotty in this regard. For the sake of argument, however, let's assume that the regime has nuclear warheads, and it has the ability to deliver them to the North American mainland. 

Okay, well, then it's a good thing nuclear deterrence works. After all, we know for sure that the Chinese regime has many nukes, and the ability to deliver them. In fact, the Chinese have had nuclear capability for decades, and will continue to have it. 

While Russia and the US both have more than 7,000 warheads and enough nuclear firepower to destroy the planet many times over, the French have 300 warheads, and China has 260 warheads.

Source: ICAN and the Arms Control Association.

Why the Silence about Chinese Nuclear Capabilities? 

Moreover, it was just last month that China rolled out new ICBMs, including the DF-31AG, which puts most of the North American mainland within reach — and undoubtedly with far greater precision and reliability than anything the North Koreans have. And yet, all we heard about in the news was about North Korea's low-rent, often-failing missile system. 

So, the Chinese can almost certainly deliver multiple nuclear warheads to North America. So why aren't we talking about a pre-emptive strike on Beijing? Why not strike now before the Chinese strike us? Is it just because the Chinese leadership — a faceless entity headed by people whom virtually no American can name — is so eminently sane? The Chinese heads of state are almost certainly sane, but unlike the North Koreans — and like the Americans — they seek expansion. This can be seen in the continued shows of strength by the Chinese state in the South China Sea and elsewhere. So why not talk about a war to stop this quest for global dominance?2

In all likelihood, few talk about pre-emptive war on China precisely because it is known that a war against China would be an unmitigated global disaster. North Korea is small enough that the US military establishment can still flatter itself with the idea that it can pull off yet another regime change without having to face a real nuclear arsenal such as that held by China. Sure, Seoul might be totally destroyed, but that is a price the Pentagon is willing to pay. 

Indeed, the vast nuclear capability of the Chinese, not to mention Pakistan's growing ICBM capability, illustrates the absurdity of the claim that any country that has nuclear weapons is about to use them on the US, and thus requires a pre-emptive war. 

Yes, North Korea is currently involved in efforts to expand its ICBM capability. But we're only hearing about it because China, Russia, and others already have the capability. They don't have to fire test missiles into the ocean. They can already nuke North America, and everyone who's paying attention knows it. We've already been down this road with the the Russians, the Chinese, the Indians, the Pakistanis, and others. 

What to Do 

So what is a reasonable response to nuclear proliferation? President Dwight Eisenhower can offer some useful insights here. 

The Soviet Union conducted its first successful nuclear tests in 1949. By the early 1950s, the Soviets were testing air-dropped bombs — which made sense for a country with a sizable air force. By 1956, the Soviets were testing medium-range ballistic missiles. 

What did Eisenhower do? Did he threaten a pre-emptive war with the Soviets? Did he massively increase military spending? 

Source: “US Military Spending in the Cold War Era” by Robert Higgs

No. In fact, during the early fifties, Eisenhower cut military spending, and by the end of Eisenhower's term, military spending had still not matched the levels built up by Harry Truman during the Korean war. This all occurred while the Soviets expanded their nuclear capability. 

Naturally, if Eisenhower were president today, he'd be denounced by neoconservatives as a Russian tool and a traitor for both his military budget-cutting and his reliance on nuclear deterrence. Fortunately for Eisenhower, however, Lindsay Graham and John McCain were not yet in the Senate. 

The larger point, of course, is that Eisenhower understood that nuclear deterrence works, and that, while it is an unfortunate option in a nuclear-armed world where much is beyond the control of the US military — it is the most reasonable and low-risk option. 

Unfortunately, the current US regime is practicing what looks like the opposite approach. 

With his constant "tough talk" about invading or attacking North Korea, Trump and his aides are courting the type of situation that leads to actual nuclear war. After all, North Korea has to only believe that the country is about to be invaded and the regime annihilated. Constant threats of invasion are just the sort of things that lead to misunderstandings, human error, miscalculation, and disastrous wars. 

Moreover, its unclear that Trump is taking seriously the possibility that China could act to defend the North Korean regime from destruction. As John Mearshimer recently noted, the Chinese regime views North Korea as an essential buffer state against Western encirclement. The Chinese regime is unlikely to sit around and do nothing while the US adds North Korea to its list of Asian client states. 

On the other hand, why talk about any of this when it all can be be dismissed with a wave of the hand, and one need only declare "they're crazy!" In that case, the possibility of World War III with China and others need not even be weighed. If Kim is "crazy" then prudence dictates we must "do something" before his suicidal insanity takes over and he nukes San Francisco. 

The "he's crazy!" claim thus acts as a magical talisman of warhawks who can denounce all caution and strategic concern that speaks against "taking out" the bad guy who will bomb us any second. 

It's easy to see why John McCain is so fond of the tactic.

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