Yesterday morning, with the US closed for holiday but with S&P futures trading modestly lower on the latest set of North Korean geopolitical fears, we asked “is this time different”, referencing last week’s similar setup, when futures gapped lower on Monday after the Kim regime shot a missile over Japan, only to surge into the end of the week.

Well, as of this morning, it seems that traders are eager to buy the latest dip, as US futures pared yesterday’s losses before markets reopen after the Labor Day holiday, as global stocks looked to put any North Korean unpleasantries into the rear view mirror and assume another happy ending: Japanese shares fell fractionally overnight, but the decline was modest as yen gains appear to have stabilized, while Asia ex Japan was higher and Europe has already moved on with bourses on the continent glowing green ahead of Thursday’s ECB meeting.

In a nutshell, North Korean risks remain just below the surface as U.S. markets reopen following long weekend. U.S. equity futures continue to remain in a tight range midway between Friday close and Globex reopening gap-lower precipitated by ICBM news from Korea. European equities open higher and rally further, led by German DAX, future closes Friday upside gap. Auto sector well supported after GM reports record Aug. China vehicle deliveries. Merck KGaA (+3.5%) also outperforms after divestment reports; energy stocks lifted as crude futures push through yesterday’s high. USD trades broadly flat, AUD marginally supported by comments RBA’s Lowe on continuing current policy. USD/JPY partially unwinds overnight risk-off move lower, TRY underperforms EMFX after political warning from Merkel. German curve slightly steeper with peripheral spreads tightening; USTs remain within yesterday’s range

The biggest dip buyers so far emerged in Europe, where most industry sectors in the Stoxx Europe 600 Index gained as data from China to the euro area pointed to more growth for the global economy. Confirmation that euro zone business activity remained robust last month helped the pan-European STOXX 600 to claw back most of the 0.5 percent it lost on Monday amid international condemnation of the previous day’s nuclear test

Meanwhile Asian markets were somewhat less euphoric: overnight China’s Caixin/Markit services PMI rose to 52.7 in August, the highest reading in three months. The market reaction to that was muted, however, with sentiment in Asian equity markets still subdued. Chinese bourses eked out small 0.2-0.3 percent gains but Seoul and Tokyo remained red. Speaking at a summit of the world’s biggest emerging economies in China, Russian President Vladimir Putin again warned that threatening military action against North Korea could trigger “a global catastrophe”. “Russia condemns North Korea’s exercises, we consider that they are a provocation … (But) ramping up military hysteria will lead to nothing good,” he told reporters.

More on the political front, overnight South Korea’s Asia Business Daily, citing an unidentified source, reported North Korea had been observed moving a rocket that appeared to be an intercontinental ballistic missile (ICBM) possibly in preparation for a launch.

As with many political risk plays over the past couple of years, market moves suggested a reluctance to price in tail risks on every possible bad outcome and more of a focus on the prosaic but upbeat global economic picture. As we showed yesterday, it has taken markets roughly 31 days on average to “fill the gap” from all post-WWII geopolitical shocks, and this time appears to be no different.

Which while understandable, is in some ways is odd, because the escalation from a potential nuclear war with North Korea shows no signs of abating: President Trump agreed to support billions of dollars in new weapons sales to South Korea after North Korea’s largest nuclear test, while the US ambassador to the United Nations, Nikki Haley said America would seek the strongest possible sanctions against Kim Jong Un’s regime. Tensions escalated after Asia Business Daily reported North Korea was preparing to fire an ICBM missile.

In currencies, the early risk off tone has dampened in early European trade, as CHF and JPY have both lost ground against their main counterparts. The Dollar recovered from earlier losses as investors unwound shorts built on Monday as Treasuries pared gains while bunds fall, though still trade higher from Friday on persistent haven demand amid a report that North Korea is preparing to fire an intercontinental ballistic missile before Saturday. 

The RBA kept rates on hold, as expected at 1.5%, with markets fairly unfazed. Immediate slight depreciation was seen in the AUD, reacting to comments from the RBA stating that a rise in AUD would lead to slower economic growth than otherwise, however, the 20-pip fall was quickly retraced. 0.8 continues to behave as resistance in AUD/USD as the August high continues to hold. Yen gains were limited. Perhaps the biggest surprise was the tumble in the onshore yuan, which after a record long rise of more than two consecutive weeks, suffered its biggest drop since Feb. 7 as the greenback erased earlier losses and the PBOC set a weaker-than-expected fixing. The CNY slid 0.29% to 6.5502 per dollar as of early morning trading. The PBOC strengthened the yuan reference rate by 0.45% to 6.5370, however this was less than the average Bloomberg survey estimate of 6.5291.

In rates, treasuries erased earlier gains and bunds slipped from the open as European stocks rose and German PMIs print stronger than forecast. The yield on 10-year Treasuries fell two basis points to 2.14 percent; Germany’s 10-year yield increased one basis point to 0.37 percent; Britain’s 10-year yield gained one basis point to 1.057 percent.

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