Asia: Stocks fall, yen jumps after North Korea bomb test

[SYDNEY] Asian stocks fell as investors turned to haven assets after the dictatorship tested a nuclear bomb on Sunday, sending the yen, gold and Treasury futures higher.

The MSCI Asia Pacific Index was on track for the biggest drop since the tension between the US and North Korea flared up following Donald Trump's "fire and fury comments" in early August.

The biggest declines were in Tokyo and Seoul, with more moderate reactions elsewhere in the region. The yen and the Swiss franc posted the biggest gains among major currencies in early Asian trading after North Korea said it successfully tested a hydrogen bomb with "unprecedentedly big power".

Futures on 10-year Treasuries advanced, with the cash market closed Monday for the Labor day holiday. Contracts on the S&P 500 Index fell, while gold rose.

US President Trump threatened to increase economic sanctions and halt trade with any nation doing business with Kim Jong Un's regime, and his defense chief said the US has "many military options."

The nuclear test, the first since Mr Trump took office, is a new hurdle for markets that have proven resilient to recent bouts of tension on the Korean peninsula. An early selloff in US equity-index futures last Tuesday after North Korea's launching of a missile over Japan was erased by the close of cash trading.

"If North Korea ratchets up provocations again to protest sanctions and pressure from the international community, tensions on the Korean Peninsula could escalate further to a different level from previous cases," said Chang Jaechul, chief economist at KB Securities Co.

"Still, a possibility of a military clash is low on the peninsula."

Additionally, Chicago-based Ariel Investments is holding more cash versus its target in the event a pullback creates buying opportunities.

"It seems to suggest that there is a belief, maybe that's hope, that rational heads will prevail," Mellody Hobson, president of Ariel, which oversees more than US$11 billion, told Bloomberg Television on Monday.

"The long-term story is very positive. My belief is that this will work itself out and I am never a believer in overreacting to any news."

The nuclear test will overshadow an average US August employment report on Friday. Nonfarm payrolls rose by 156,000, below the median estimate of 180,000 in a Bloomberg survey of economists, and revisions for the prior two months subtracted 41,000 jobs.

US stocks rose and Treasures declined as investors chose to focus instead on separate reports that showed American factories ramped up in August to the fastest pace of expansion in six years, while consumer sentiment climbed to a three-month high amid an improving outlook for household finances and the economy.

Terminal subscribers can read more on our Markets Live blog.

Among other key events this week: A plethora of China data is scheduled for this week. Trade figures are anticipated to show another month of solid export growth, while FX reserves probably continued to rise on stricter capital controls, robust growth and a stronger yuan, Bloomberg Intelligence said. Caixin's China services PMI and consumer and producer price data are also out.  In Japan, second-quarter GDP, may be revised downward.

Indonesia CPI is due Monday.

The European Central Bank meets on Thursday. President Mario Draghi will express concern over the euro's strength when the ECB meets this week, but won't say much about his asset-purchase programme's future, according to a survey. He's now expected to wait until at least October before announcing big changes to QE, most economists predicted. Officials may not have a full plan until December, people familiar told Bloomberg on Friday.

Several Federal Reserve officials speak this week, including member of the Board of Governors Lael Brainard, Minneapolis Fed President Neel Kashkari, Dallas Fed President Robert Kaplan and New York Fed President Bill Dudley, who all have expressed doubt about the need for another rate hike this year.

Cleveland Fed President Loretta Mester, who has argued for a gradual pace of tightening despite tepid inflation, will also talk.

US markets are closed Monday.

STOCKS

Japan's Topix index lost as much as 1.2 per cent and was one per cent lower as of 11:06am in Tokyo, while South Korea's Kospi index lost 0.6 per cent and the S&P/ASX 200 Index in Sydney declined 0.3 per cent.

The Hang Seng Index in Hong Kong fell 0.4 per cent, while Chinese gauges were higher.

Contracts on the S&P 500 slipped 0.3 per cent to 2,465.75. The underlying index rose 0.2 per cent on Friday, while the Dow Jones Industrial Average climbed 0.2 per cent.

The MSCI Asia Pacific Index fell 0.4 per cent, poised for its worst decline since Aug 11.

CURRENCIES

The yen climbed 0.5 per cent to 109.73 per US dollar, while the Swiss franc was up 0.4 per cent.

The euro climbed 0.2 per cent to US$1.1886.

The Korean won dropped 0.8 per cent to 1,131.90 per US dollar.

The Australian dollar fell 0.1 per cent to 79.64 US cents.

The Bloomberg Dollar Spot Index slipped 0.1 per cent.

BONDS

Treasury 10-year futures contract for December delivery rose as much as 11/32 to 126 30/32.

Yields on Australian 10-year bonds declined about two basis points to 2.64 per cent.

COMMODITIES

West Texas Intermediate crude added 0.3 per cent to US$47.44 a barrel.

Gold rose 0.6 per cent to US$1,333.24 an ounce.

BLOOMBERG