Asian equities were pressured amid reports of NK conducting its 6th nuclear test over the weekend

This bolstered the JPY across the board and saw USD/JPY gap lower by a point before gradually paring half its losses

Looking ahead, today sees a lack of notable highlights. US markets closed for Labor Day

ASIA

Sentiment was dampened across the Asia-Pac region on increased geopolitical concerns after North Korea conducted its 6th nuclear test over the weekend, which it claimed was a hydrogen bomb and is feared to be much more powerful than any of its prior tests. This weighed on ASX 200 (-0.3%), Nikkei 225 (-1.0%) and KOSPI (-0.9%) from the open with Japanese exporters also feeling the brunt of the flows into safe-haven JPY, while gold miners helped alleviate some of the pressure in Australia after the precious metal surged on the flight-to-quality. Chinese markets were mixed as Hang Seng (-0.4%) conformed to the downbeat tone and the Shanghai Comp. (+0.1%) bucked the trend on strength in commodities names. 10yr JGBs were initially higher amid the risk-averse tone and as 10yr yields continued to decline to reach its lowest since November of -0.07%. However, gains were gradually pared and the BoJ’s presence also failed to inspire any significant demand, with its Rinban operation at a paltry JPY 400bln.

PBoC refrained from open market operations again today, due to relatively high liquidity in the banking system. (Newswires)

PBoC set CNY mid-point at 6.5668 (Prev. 6.5909)

EUROPE

German Chancellor Merkel and SPD Party Leader Schulz held a televised debate on Sunday in which an ARD poll suggested that Merkel was viewed more convincing by 55%, while Schulz was preferred by 35%. (Newswires)

Fitch affirmed Germany at 'AAA'; outlook stable and affirmed Czech Republic at ‘A+’; outlook revised to positive. S&P affirmed Sweden at ‘AAA’; outlook stable and affirmed Lithuania at ‘A-‘, outlook revised to positive. Moody’s affirmed Portugal at ‘Ba1’; outlook revised to positive. DBRS confirmed Republic of Finland at AA (high), Stable Trend. (Newswires)

UK

UK Brexit Minister Davis said he suspects UK will be making some payment to the EU budget following Brexit but has denied that the government have privately agreed a GBP 50bln divorce figure. There were also comments from EU Budget Oettinger that the UK has committed to financing a portion of EU’s total budget by 2020 as part of multi-annual financial framework. (Newswires)

UK PM May is now thought more likely to delay a potential ministerial shake-up, using her ability to reward supporters and punish rebels to reassert her authority after angering some MPs by vowing to lead the party into the next election. Conservative Campaign Headquarters had expected the prime minister to overhaul jobs in the government after the party conference next month. (Times)

Most economists do not expect UK interest rates to rise until 2019 despite inflation remaining above target, according to a BBC snapshot survey. (BBC)

FX

The latest provocation by North Korea which some viewed as a possible game-changer triggered flows into safe-havens, which bolstered the JPY across the board and saw USD/JPY gap lower by a point before gradually paring half its losses. Most majors failed to sustain opening price action and are relatively flat to take a breather from Friday’s choppy trade, where participants mulled over mixed data including soft US Non-farm Payrolls which is atypical of August. In addition, market closures in both US and Canada for Labor Day/Labour Day and a lack of tier-1 data added to the quiet tone seen in most currencies aside from JPY.

COMMODITIES

Commodities were supported overnight in which gold (+0.7%) gained over USD 10/oz at the reopen due to safe-haven demand after North Korea conducted what was seen to be its most powerful nuclear test. WTI was mildly positive and RBOB was pressured amid operation resumption announcements including the Colonial Pipeline’s main distillate and gasoline line for Monday, while copper benefitted alongside broad strength across the commodities complex and continued surge in Dalian iron ore prices.

US Baker Hughes Rig Count (Total) 943 (Prev. 940). (Newswires)

Colonial Pipeline stated that it is to restart the Texas section of its main distillate and gasoline lines, while there were other reports of refiners resuming operations in the Houston-area crude pipelines. (Newswires)

Russian Deputy PM Dvorkovich reiterated they are likely to support a further extension of the OPEC output cut deal. (Newswires)

GEOPOLITICAL

North Korea conducted a nuclear test over the weekend which it claimed was a hydrogen bomb. This was seen to be more powerful then all its previous nuclear tests and was stated to have registered equivalent to a magnitude 6.3 according to USGS. Furthermore, the test prompted comments from US Secretary of Defence Mattis that any tspaneat to US, its territories or allies will be met with a massive military response, while US President Trump commented "we'll see" regarding a possible attack on North Korea. (Newswires)

Note: Some experts have noted credibility in the claim that the test was an H-bomb, which is more powerful than the type of atomic bombs that North Korea was seen to have tested previously and stronger than the type dropped in Japan during World War 2.

South Korea conducted a ballistic missile drill targeting North Korea nuclear test site, in response to the latest nuclear test by North Korea. (Newswires)

US

Despite the soft labour market report, yields traded higher across the board with IFR noting massive long liquidations and some large sized block sales in the wake of the data. Other US data was also more upbeat with the ISM manufacturing rising to 58.8 from 56.3, well above the 65.5 expected. The figure was the highest in six years and will give the hawks on the Fed some confidence that they can resume hiking rates. Dec’17 10y T-note futures settled at 126.21+, down 10 ticks.

Goldman Sachs reduced its probability of a US government shutdown to 35% from 50%. (Newswires)