♪ it is 8:00 a.m. in seoul, korea, where the stakes have been raised. north korea sending geopolitical tensions to the highest since cuba, the north saying kim jong-un has a warhead on an icbm. washington promises an overwhelming response. china and russia call for diplomacy, not war. ♪ >> from bloomberg's global

headquarters in new york, it is just after 7:00 p.m. sunday evening. it is just past 7:00 in the morning as we look ahead to what may be a tumultuous start to the trading week. >> may be indeed. our top story is the rising threat from north korea. pyongyang saying it tested a hydrogen bomb at the weekend, claiming it has fitted a nuclear warhead onto an icbm. high, thens are highest since the cuban missile crisis. do you feel that tension right now as the south koreans get to work here after seeing what happened over the weekend? it is quite remarkable. you don't feel that tension.

traffic seems like business as usual. scheduled fashion show expected to be happening in the business district around 5:00 this afternoon. rehearsals are still going on. it just goes to show that the show must go on, but as you mentioned, elevated tensions in the last 24 hours. the southrning from korean military confirming they have conducted live fire exercises targeting north korea's nuclear test site. saying aia saying long-range missile did hit designated targets in the east sea. potentially does change the stakes for everyone involved. sixth nuclear test

from pyongyang, the strongest we have seen, just from the trimmers. they were the most powerful we have seen from pyongyang itself, measuring 100 kilotons. that artificial earthquake measuring at 6.3. ae south koreans put that little less powerful than that, but still 5.7, and six times stronger than the last from pyongyang. not only are the missile launchers quicker by the day, but the strength of these nuclear tests have been showing just how far north korea's ambitions and technologically how far their capabilities have come. and how close south korea is to north korea in proximity. talk on the ground

about making preparations for a possible nuclear attack? news, our people talking about that on the ground? yvonne: obviously there has been some talk in local media when you turn on the tv. focused on the white house, mixed messages from president trump, tweeting, not just condemning this act and calling north korea a rogue nation and saying these were hostile acts we have seen. this pictures from the state news agency from north korea over the weekend, where we did -un seemingly looking at some nuclear weapon that they say is a hydrogen bomb. there has been no official evidencing this is a hydrogen bomb.

some experts say this may be a boosted atomic bomb at best, but there has been some confusion which the blue house has had to try to react from the comments from trump himself, saying these talks of appeasement from south korea are not effective. we also heard comments from the defense secretary general mattis saying our amendments to our allies are ironclad. they are looking at all options, , so a littleitary difference in language coming out from the white house is itself, but in terms of moving in south korea on north korea policy, that is still unclear. well: so we understand as as business gets underway in seoul, korea that regulators are meeting at the moment, the finance ministry, the bank of korea in the mix. we are getting some lines out of the finance ministry that the

market impact, and this is curious to come from them, the market impact from north korea want the short term. what else do we know and what are we expecting this morning as far as the meetings by regulators are concerned? obviously the market impact will be crucial, but as haveentioned, we really not seen a lot of reaction coming from the markets. in fact, we see these one day knee-jerk reactions, a risk off move to traditional haven assets like the yen, gold, and like treasuries of course come a but we have seen things bounce back up within a day or two . investors seeing this as a by the debt mentality that still seems to be intact in the markets. there is also concerned with the won itself. given geopolitical pretensions,

the currency tends to weaken, and whether this prompts the bank of korea to intervene, that is a big question, possibly what will be discussed at this meeting on top of the un's security meeting later in the u.s. at 10:00 p.m. in new york. betty: lots of diplomacy happening. thank you so much. nextill be with us to the few hours. let's look at how the markets have been reacting to these headlines. were getting a first glimpse as to futures in the u.s. trade is then, a holiday weekend, the futures stabilizing, down .4%, but we have seen that rush to save havens, the swiss franc and japanese yen gaining on the back of this news. however, holding on to strengthen the swiss franc, trading at .96 against the dollar.

still interesting to see that the dollar is still lower by a homeless .5%. gold futures. gold has had a huge run-up, the headlines in official, trading at $1341 for ounce, up almost 1%. that is a risk off play for asia as it opens up trade. david: it does. when you look at the gold play, that might be one area that might see some green. broadly speaking, at the moment, new zealand flat. kiwi dollar a slight bid here. japan, and south korea are the three big markets we are waiting to open up and react to these developments on the weekend. there we go. 2.63, i cap lower of four basis points on the aussie 10 year, flat on the aussie dollar.

there we go. japan, this will be interesting. we are trading on the futures on the nikkei. points lower from the close on friday. stronger japanese yen, below 110 will create a lot of pressure on equities in japan. ,e are watching the nikkei vix last traded at 15 point 17 and we expected to inch higher as we get underway in tokyo and just over an hour from now. get some more perspective from the u.s. angle, the view from washington. laura, just to give you a sense of what we have been seeing out of donald trump's twitter feed on north korea. this is the between everyone is talking about. findingsouth korea

their talk of appeasement with north korea will not work. they only understand one yang. so saving his harshest words on the situation for the south koreans. we know president trump met with the defense secretary. what is the next step? >> the administration is sending two different messages. putting focusis on economic sanctions today. the treasury secretary is doing the same thing, calling for a ban on trade with companies and countries that do business with we haverea, but then the defense secretary after meeting with the president and vice president and the chair of the joint chiefs of staff saying there would be a massive military response if north korea continues to threaten our allies , and so it is not the fire and fury rhetoric, but strong rhetoric coming from him today,

saying we are not looking to annihilate north korea, but have many military options. david: we also heard from the treasury secretary steven mnuchin when asked about north korea on a sunday talk show. let me play that soundbite. listen in. is clear that this behavior is completely unacceptable. we have already started with sanctions against north korea, but i would draft a sanctions activist us into the president for his consideration that anybody who was to trade or do business with them would be prevented from doing trade and business with us. allies,work with our with china, but people need to cut off north korea economically. this is unacceptable behavior. david: the question is how can sanctions be more effective? >> some analysts had a few thoughts about that today. we have gone through several rounds of these. had the united nations

put restrictions in place that should reduce exports by about $1 billion, and congress included some sanctions. some of the analysts have said we need to probably do what they are talking about, to move towards third-party countries, china, maybe others. behaviorsto focus on rather than target to target and country to country, focusing on money laundering and specific behaviors. another thing that was raised is the idea of much more stringent interdiction of shipments coming to and from north korea. we have to worry about of technology, more materials coming in that could be used to develop more weapons, and this has been spotty. saying the analysts were that is something we need to step up, even though china may

not be comfortable with that. betty: lawmakers when they convene on tuesday get back to work in congress. they will weigh the administration's comments about renegotiating the south korean trade pact. what are the sentiments there are about renegotiating or pulling out? >> some of the initial comments are not very favorable in that regard. one commentor dismissed the idea and said it would be bad timing to do that. one thing to remember is that republicans in congress are free traders and don't agree with the positions on these matters, and they are becoming more vocal in recent months against this president on things, especially as the president has attacked the senate majority leader mitch mcconnell in august with comments on the incidence in charlottesville. we may see that come to play in

any efforts to end that trade pact. that was our bloomberg congressional reporter joining us live on the latest reaction out of washington. let's look at first word news now. haslinda amin is live in singapore. chief brexit eu's negotiator is said to be running out of patience with the u.k. after the second round of negotiations ended last week with little progress. that -- bbcsaid said that the british people must be educated about the cost of leaving the eu and the sears consequences, which he says have not been made clear. resolving the issues on the table, then we will think about our future relationship. it is no secret that we think we

need to have a strong trade relationship with the u.k., but first things first. haslinda: two days after president trump asked congress for $8 billion, the governor of texas says the ultimate bill may top the $120 billion spent on katrina. said the request was simply a down payment and the number of people affected far outweigh katrina or superstorm sandy. steven mnuchin says congress should combine initial aid relief with an increase in the u.s. debt ceiling, saying lawmakers need to put policy aside to ensure that the victims of harvey get the help they need. it is intended to avoid a standout they could rattle the market. stephen mnuchin repeatedly said congress must raise the debt ceiling by september 29. the man who predicted the 2008 financial crisis also forecasted

the damage in india. he said he was asked about de-monetization when he was still rbi governor. he saww book he said potential long-term benefits, but felt the short-term economic hit would outweigh them. he also wrote that he made his few known in "in no uncertain terms." global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. david: thank you. right, we will discuss the implications of north korea's latest nuclear test in the next hour. we will be joined by james mccormick of finch in a hong kong studio. templeton's mark mobius joining bloomberg just after 11:00 hong kong time. you don't want to miss what he has to say on the latest provocations from north korea.

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♪ this is "daybreak asia" in hong kong. betty: north korea's latest nuclear tests close to haven assets higher at any time than the cuban missile crisis. let's discuss all the implications with ubs securities australia global macro strategist. that bottoms up investor who said this is more bean opportune time to looking for opportunities despite geopolitical tensions. you read into the contained reaction we are getting in the markets to this latest headline that we are all waking up to? >> i think you are right. you are seeing a bid for the

yen, lawns as well, but in the big scheme of things, quite contain reactions. factnk it reflects the that it is a new development, the situation already rattling markets for some time. it is not entirely new. the market has been pricing some risk of escalation before, so that's essentially what we are seeing this morning. seeingit is what we are this morning. i want to pull up a chart that shows you the rush into the safe haven assets. it is 352. monthly moves have been quite march over the last several months. you've seen a piling into gold with these north korean headlines, but not as much as 2016, so it seems like we still have a ways to go when it comes to sing gold move higher on these headlines.

o seeing gold move higher on these headlines. why do you think that is? >> i think you have a pretty strong offsetting factor rum central banks, the fed tightening policy a fair bit, the market focusing on second movers central banks, the ecb, the bank of canada, etc. higher real yields and to the extent central banks are pushing itreal yields globally, tends to be a bear factor for gold was so you have two competing forces there. changedoes any of this at all the view on what central banks can do, particularly the fed? , perhaps indirectly, but not significantly by any extent. the fed is looking at the u.s. to globalth an eye

conditions and the global economy. dollar is the you week on the back of these developments. equity prices notwithstanding a more cautious reaction over the last few weeks are still very, very high, so financial conditions in the u.s. aside from this geopolitical development are very, very loose. david: how does it filter in here? i'm looking at some of your calls here. you are saying it is time to lighten up on duration. if i listen to all these projections that rates were going to move up, i would have lost a lot of money. why should i heed that advice now? iswell, i don't think it time to go massively underway to bonds. until look at front ends the end of 2018, the market is

not pricing in one hike from the fed. that is quite conservative. it is look at australia, pricing in more tightening in australia than the u.s. candidate is pricing more than two hikes over the next 15-16 months or so. in the big scheme of things, i think this looks mispriced, it ticket with regard to the u.s., and if those front end rates move higher as the fed does more than what is priced in, there is a decent chance you will see bond yields move higher across the curve. i would also say that i don't think that the main factor pushing up global yields will be the u.s. market going forward. looks moren market mispriced from a fundamental perspective and there is more room to move higher. david: what does mario draghi do? does he start talking it down? >> it is possible.

a very has to tread careful line here. on the one hand, they have a strong economy, nice green shoots in terms of growth and sentiment week celebrating, but on the other hand, inflation is very low, too low for comfort, having rally,uro that will weigh further on inflation, so the immediate september outlook for the ecb, i think the focus will be on what they do to their forecast for inflation. they will come down a little bit, which could be a dovish, near-term message, but the longer-term story remains that the ecb has to start paring back on qe and accommodation. david: we have to leave it there. the ubs securities australia global macro strategist. topcan get a roundup of the

stories you need to know in today's edition of daybreak. there is one story in town. bloomberg subscribers go to dayb on your terminals and on the bloomberg anywhere app. you can customize your settings to the industry in assets that you care about. this is bloomberg. ♪

♪ upid: let's get you caught on the latest business flash headlines. reports from australia say commonwealth bank will announce the departure of two directors, a third in the next 12 months. the austrian financial review court and sources say the new treasury secretary may be named a nonexecutive director monday. it would not preclude him from being the next chief executive of the cba. says: one company affected his plans don't clash with the

new rules. the focus is on sectors the government says are acceptable. much more ahead on "daybreak asia" next. this is bloomberg. ♪

♪ morningt is 7:30 in the in hong kong where it is shaping start.e a fairly great -- gray start. betty: looking pretty grim, david. here, it wasone raining here. 7:30 p.m. in new york where friday higher,on but we are seeing futures trading lower, given the headlines coming out from the north korean test. i am betty liu in new york.

david: you are watching daybreak asia. let's get you caught up with first word news. haslinda amin is live in singapore. geopolitical tensions are rising again with north korea claiming it has fitted a nuclear warhead on intercontinental elastic vessel. they say they tested a hydrogen bomb this weekend and fitted a similar device onto an icbm. they said it has an explosive force of 100 kilotons, six times greater than the bottom america dropped on hiroshima to end the second world war. >> north korea ignored repeated warnings from the international community and forcefully conducted a nuclear test. we cannot tolerate that. whether we can stop their violent action threatening world peace is up to how the international committee will

work. japan will deal with the matter by coordinating with the united states and south korea and the community like china and russia. resume innafta talks mexico city. the u.s. and canada want better wages and conditions for mexican workers, to reduce the number heading north, and change companies going south. trump has threatened to quit nafta unless the other party's agree to a major overhaul. deems to haveis won the debate despite being on the defensive. the other was against the scandal, immigrants and more. they gave the chancellor the win, but the boat is remain

undecided. -- the popular vote remains undecided. latest bring you the analysis in the chair -- the german run-up to the election. global news 24 hours a day powered by more than 2700 journalists and analysts in more than 100 20 countries. i am haslinda amin. david: thank you, dollar-yen below 110. look at what we should be watching with trading. sophie is here, and i guess by any measure it was not a quiet sunday, this latest act of self-defense out of north korea. are we looking at a nervous start to the trading week? your getting comments saying it will be temporary. >> we had the bank of korea and finance minister officials, the finance chief saying that will on the market

economy, but fares are looking more sanguine. the reaction will likely be short-lived unless there is potential reaction to north korea. and this risk aversion could be similar to what we saw last week when earlier reaction became more measured as the day wore on. we have again, swiss franc, and higher.the yen come short positions are taken off the table. the dollar-yen is looking top-heavy, according to j.p. morgan. the downside near the year low, 120, and reaching the 2017 low, --april one of 8.13, that 108.13. that will require serious investment. this date for north korea is just around the order. hedge funds are sticking with

the short positions despite gainss gains -- the yen's here. this is the third most popular over major currency pairs, but things could turn ugly. but see what is going on with contracts and setting us up for the day. this could be a drag on japanese stocks, the korean stocks have a positive spot. investors will have to lower long-term expectations from south korean markets. the volatility could pick up. looking at the past, the kospi has gone between 2% and 5% on south korea risk. david: i understand why people short the yen, but it could be painful. state equity space, what sectors are we marching -- are we watching? sophie: defense is in the limelight, given south korea and japan could go against this

backdrop. showing you stocks in seoul and tokyo, we have the tech has gained. lng, they have 60% of sales from guided weapons. koreay could spend on the and japan missile defense system. requestedcollected -- $8 million for a defense budget. ant of that would go to aging system that shoots down ballistic missiles. favoredhose surveyed introducing that defense system, but a separate poll by another newspaper saint japanese prefer diplomatic efforts. -- say japanese prefer diplomatic efforts. betty: airlines in the region may not be in a rosy position. why? sophie: we need to look at how

those stock spare. korean air, they could be hit interestsis if for choose to abort -- foreign tourists choose to avoid south korea. airport made up 43% of the total quarter. south korea carriers are already grappling with fewer foreign visitors from china and japan. the total number fell 41% in july. look at the defense space this morning as we look at risk sentiment that the north korean provocation. betty: thank you for keeping your eye on the market and the different movers. staying on the top story, north korea's seemingly most advanced nuclear test to date, yvonne man went to seoul for us. we will bring in tom mackenzie as well. we were just hearing headlines from south korea's finance

minister speaking about the impact, say this will not be a transitory impact on the market. this will not be short-term. what else has he been saying? chiefs are finance not taking it lightly. we talked about the analysts are saying it will be transitory, the knee-jerk reactions are short-term. they are saying this could be more than that as we have seen more of the tensions with the north escalate. they are watching the financial market, the move in stocks will wan as well. if they need be, they will step in, but also the impact on the economy. we have seen 2.7% growth for south korea, robust when it comes to trade, exports continuing to power on, but the concern is if this will start to dampen animal spirits in south

.orea, consumer sentiment maybe they will start delaying investment plans given the geopolitical tensions we have seen. that has not translated just yet, but a concern among the finance chiefs and some economists is there is some flag ag effect.d -- l another element is elevation of toctions, economic sanctions north korea. we have heard the likes from the u.s., japan saying they want to raise get a higher when it comes to oil sanctions, which can cripple the north korean economy . south korea, we have seen it back and forth with this issue, the president of the conservative party has wanted peaceful talks. maybe not get to that level, but the opposition parties.

south korea -- parties here in south korea are with the u.s. david: if you remember part of president move campaigned on was better relations with north korea. does this change the game with policy? how does that affect strategy resort yvonne: if you remember that president man was elected -- moon was elected, he came out with a speech. said, if north korea develops the technological capabilities to attack a nuclear -- attach a --lear warhead to in a cbm two an icbm, that may change what is his red line. this escalation we have seen could be crossing it. we have heard from the blue house the last 24 hours saying it is unclear if this is a game

changer if it comes to policy on pyongyang. they are still pushing for the so to speak.s they favor them for diplomacy is narrowing day to day. -- they say the room for diplomacy is narrowing day to day. president xi is hosting many diplomats. this has happened before where north korea has disrupted a meeting with some type of provocation. what message do you think today north korea is trying to send to china? loss of faceher for president xi. there was a missile test with the belt and road summit. this is the second time, as you say. it is a humiliation for the chinese and a challenge for

beijing. it is a challenge from washington because president xi is hosting the presidents and leadership from russia, india, south africa, brazil. he gave a speech talking about corporation that is hollow only this nuclear test and divisions we are seeing around the korean peninsula. china put out a statement saying it condemns the test, calling on north korea to abide by security council resolutions and for a restart of dialogue. there was editorial on the state run global times thing it seems further sanctions are inevitable, but the embargo of north korea is the wrong approach, saying china should monitor nuclear fallout. there were rumbles, vibrations in northeastern towns near the that. in china following so there are reverberations. whether it changes the status

quo, it seems unlikely in the short to medium term, china is as well documented is concerned about the collapse of their regime and a unified korea that would be supported or back by the u.s. on its order. it is likely to raise the pressure on beijing from washington. whether or not they look to impose sanctions is a question. they give food aid and oil to the regime in pyongyang. david: we were looking at pictures of vladimir putin. what are the russians doing? how have they changed? not really -- tom: the russians and chinese are similar, the russians saying it was premature to start talking about further sanctions but also condemning the nuclear test, calling for further

dialogue. both russia and china are calling on south korea and the u.s. to stop military exercises. toy want all of the parties sit down and talk. we have vladimir putin in the city right now. he is having meetings with president xi no doubt a topic of conversation for both of these leaders. russia has trade with north korea and the city of vladivostok which is the nearest russian city to the border also felt tremors from the nuclear test. it is a matter of concern, but a lot -- but dialogue is pushing forward. betty: looking for diplomatic solutions. thank you so much to tom mackenzie and yvonne man, the person on the ground in seoul. more on north korea with a former advisor to the u.s. commerce department specializing in asia affairs.

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♪ david: minutes away from the open of market, seoul, tokyo, sydney. futures, a little bit to the upside. some comments out of the finance minister of south korea saying this increased geopolitical risk and tension might filter through to the financial markets and be there and be present, not just in the short-term. that is something we have heard of the finance minister. we will see how things get underway 12 minutes from now. this is daybreak: asia. i am david ingles. betty: i betty liu. there are rising tensions marked by the north korean nuclear test

. this is days after the firing of a missile over japan. the incidence underlying north korea's intention to become a fully capable nuclear power. let's discuss this with the king. strategy vp i want to mention the headlines we saw from the finance chief of south korea saying this is going to have an impact on the economy. this is not transitory does i with the markets -- despite what the markets seem to be saying. >> it is his country, but i am surprised the prime minister is saying that. it is like he is trying to talk down the market. you would expect him to be minimizing it. i don't know what that is all about. so it has been less than 24 hours since the test. let's see what we find out in the next few days. betty: what is the likelihood further tradete

tensions, that president trump will use this and use trade as a leverage to get his asian underparts to do more of your -- counterparts to do more? sean: i don't think we will have a trade war. the u.s. needs asia more. in terms of general trade tensions, this could be a good time for it. too many countries including france of hours -- friend of ours do risk business with north korea. briskk business -- business north korea. visits thee minister white house, he wants to be asked, why do you let them hang around? conversations on chinese entities and thinks that enable north korea and we should deny u.s. dollar access to chinese oil companies supplying to north

korea. betty: i want to pull up a chart for our viewers. 7235.interesting, btv it shows how we have seen exports and imports into north korea from china, they have been reduced as of late. not severely. there is robust trade going on between the two. why is that? sean: because china fears the north korean collapse. they want north korea around for two reasons -- actually one, they want to keep the u.s. are their border. even if we not put troops at the 38 parallel likely to greek -- like we agreed with east germany, they would have a u.s. ally on their border. like east germany, no south korea will go to china. kick the canuse to

down the road, but they want north korea. and north korea does business with other countries through china but china is not the end market itself. david: very simple question. it seems like the issue is quite complex on stakeholders. whose court using the ball is in now? sean: that is a good question. i would say trump's courts right now to get china hard -- hit china hard on sanctions. it should be draconian, not the in brick up today, but the high-level chinese enterprises to --nying u.s. access u.s. dollar access to oil companies. south korea is irrelevant because north korea takes south korea seriously. they see them as a colonial puppet of the u.s. what south korea says does not

matter. what we do matters most. we should get china hard and not -- hit china hard not get out of a trade agreement with the you -- with south korea. david: secondary sanctions on china related or north korea and china related entities -- what other options does the u.s. have if those do not work? nonmilitary of course. sean: that and we need to lean on our friends and allies. mnuchin walked it back, but he said we will see trade with countries across korea. friends like the philippines, thailand, malaysia, great britain, they have north korean embassies. why? don't think of north korea as a country. it is a religious cult. they will never give up the nukes. they can't because they are a poor man south korea otherwise.

we need to end the regime. betty: speaking of south korea, i want to pull up a trump tweet, he said, south korea is finding and i have told them there talk of appeasement with north korea will not work. they only understand one thing. it was pointed out in a , he saved his harshest words this time not for china or north korea but south korea. what do you read? sean: i am wondering why rex tillerson said north korea was showing restraint. because of the ultranationalist ideology, what south korea does doesn't affect north korea's behavior. even if that were the case, you don't want to say that. don't show division between a close ally at a time of crisis. i can't begin that death begin to understand that. betty: what are the

ramifications? sean: it is discerning to the best concerning to the south korean public. even though president moon campaigned on being nice to north korea, that is not what got him in office. betty: thank you so much for joining us. shawn king of park strategies. we will have much more on daybreak asia. one feature we would not to bring to your it that we want to bring to your attention is the interactive tv function. you can watch us live and see previous interviews, dive into securities and functions we talk about, and become part of the conversation by sending us instant messages. this is for bloomberg subscribers only. check it out. this is bloomberg. ♪

♪ betty: quick check of the business flash headlines at this hour, lenovo's owner is seeking

control of one of the oldest private banks in europe. they sustained -- paid $1.8 million for the bank international of luxembourg. the bank was founded in 1856 and has asked assets valued at $45 million. they also control connie n rate, real estate. cars: double deliveries of in germany into july. continuepect growth to growth to they expect continue at this tempo. bmw announced a makeover of its electric car facing competition from tesla. coming up, the global heads of sovereign ratings join us in hong kong. the forecast down and financial risks from north korea and the growth slump in india. ♪ betty: we are counting down to

the asia market open, moments away and the reaction to this nuclear test by north korea. this is bloomberg. ♪

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♪ is 8:00 a.m. in hong kong where we are live from bloomberg asia headquarters. welcome to "daybreak asia" and your top stories. let's talk about north korea, top story. geopolitical tensions the highest since cuba. north korea says it has fitted a neutral or on an icbm. washington promises an overwhelming response, while china and russia call for jaw jaw, not war. betty: it is just after 8:00 p.m..

losingxit leader patience saying the u.k. needs to understand the price of walking away. counting the costs, the texas governor says harvey may be more expensive than hurricane katrina. ♪ betty: the major markets are just opening right now. south korea and japan, for those who want to get caught up on what the reaction has been so far to this nuclear test from , a quick reminder that we heard the u.s. say there are many military options on the the defenseer secretary saying they are not looking to annihilate any country, including north korea. japan saying all options are on

the table, standing by the u.s. south korea urging the north to agree to talks. we are still looking for the automatic route, the negotiation route, which they got criticized for by president trump his twitter feed over the weekend. david: it has not moved the needle, has it? that's what they said each and every time we got this from north korea. we did hear statements from g10 leaders as well. thesticking point is what new approach should actually be. as you mentioned, more still calling on diplomacy, china and russia of course. a will get more on that in moment, but let's look how markets are opening up. is takingkorean kospi it on the chin. falling 1.4%, the

biggest drop since july, so extending losses for a third day. actualkei also on the it, snapping a three day rise. shares under pressure, the asx 200 falling .1% as north korea is looking to overshadow other catalysts. these geopolitical risks at the forefront. the hope is that cooler heads may prevail. melanie hobson telling us earlier that the markets may not be for seeing a calamity with the expectations of more measured moves later in the day, but traders will have to price send president trump's recent rhetoric on sanctions and halting trait with businesses and countries that engage with north korea. down out the korean won .6%.

korean assets taking it on the chin. the dollar also on the back foot , down .1%, but the euro up, and yen and swiss franc maintaining gains. $1335 antrading at ounce. we did have moves on the jgb 10 year yield, falling low zero, the lowest since november. taking a look at what is moving in the nikkei, sliding .4%, only energy and utilities the bright spots. health care, telcos, and i.t. stocks leading the drop in tokyo. one analyst has pointed out japanese stocks tend to shrug off missile and nuclear tests, and expects to see it today barring further developments. another analyst seeing selling could be contained, small cap

stocks looking resilient with less exposure to overseas business. let's look at what is dragging on the kospi, real estate plunging 2.5%, i.t. over 1%, a significant drop for most korean today, including airline players exposed to visitors wanting to come to south korea. a check on korean auto stocks after their august sales fell. 6%, so aotors fell drop for korean automakers today as well. far it ising like so very much risk off in the asian session this morning. betty: it seems that way. red behind sophie. let's get first word news now. >> south korea says the rising geopolitical risks created by the north's latest nuclear test

could have a long-term impact on the economy. keepinance minister will an eye on the markets for the foreseeable future and will take measures to stabilize if necessary. pyongyang claims it has miniaturized a nuclear weapon and fitted it to an icbm, although the claim is doubted. the chief brexit negotiator is said to be running out of patience with the u.k. after the second round of negotiations ended last week with little progress. italyd the conference in that the british people must be "educated" up up the costs of leaving the eu and the serious consequences of the splint, which he says has not been made clear. resolving start by the issues that are on the table, then we will think about our future relationship. it is no secret that we think that we need to have a very , butg trade relationship

first things first, again. after president trump asked congress for $8 billion to clean up after harvey the governor of texas says the ultimate film a top the one hundred $20 billion spent on hurricane katrina. governor greg abbott said the initial amount was a down payment and the people affected and the size of the disaster out way katrina or superstorm sandy. treasury secretary steven mnuchin and says congress should combined initial relief with an increase in the u.s. debt lawmakers need to put politics aside to ensure that the victims of harvey get the help they need. the two measures and trying to avoid a standoff they could rattle the markets. he has repeatedly said congress must raise the debt ceiling by september 29. global news 24 hours a day powered by more than 2700 journalists and analysts in more

than 120 countries. this is bloomberg. ,etty: on to our top story staying on our top story, geopolitical tensions the highest since the cuban missile crisis. north korea saying it has fitted a nuclear weapon to an icbm. washington has promised to any attack while beijing and moscow are calling for talks. we are joined by our top asia as editor, jodi's neither. it seems like it is is this as usual -- it is business as usual, but the kospi taking it on the chin this morning. is there a sense this will have a bigger impact it will not be the transitory situation we might have seen with other icbm launches that we have seen from north korea? ground, things are

pretty much the same. we see gardeners here in this area back to work on this monday morning. monday morning traffic picking up in the last hour or so. talking to a guest earlier in the 7:00 hour about how finance chiefs are talking down the markets when they should be trying to calm investors nerves. they say this could have more than short-term implications, not just financial markets, but the economy as well, saying some of these issues diplomatically are so difficult to resolve that this could have some type of negative effect on growth prospects in south korea. the finance chief saying they will be conducting meetings on a daily basis now and monitoring these headlines from north korea and whether this will have an effect on the economy.

that is the impact and the response on the market front. in terms of the military front, thehe last couple of hours, south korean military confirmed they did in fact conduct live fire exercises just a couple of hours ago, including a ballistic missile, a long-range air to ground missile system, along with f-15 fighter jets. targeting the north korean nuclear test site and able according to local reports accurately hit these designated targets on the east see, but militarily speaking, the comments from the white house that this is potentially raising the stakes, the sixth nuclear test since 2006, and the most powerful yet. this, we sawe of this artificial earthquake register by this test six point three according to the

u.s., 5.7 according to south korea, still weaker than the u.s., but those tremors that were felt were the equivalent to five or six times stronger than we saw from pyongyang's last nuclear test in 2016 and comparable 526 times stronger when the u.s. drop their nuclear bomb on hiroshima in 1945. the question is that it just theiro show how far capabilities have come in pyongyang and where their ambitions are. this is after we heard from the state news agency posting that venture of kim jong-un looking at what appears to be a nuclear weapon. still a lot of questions on whether this was some type of h-bomb they are claiming it could be. thatve seen no evidence of , some thinking it could just be a boosted atomic tom, but -- bomb, but where we go from here

will be the big question and whether we will see the military impact from the u.s. and japan. i want to bring you into the conversation. she was talking about that artificial earthquake. it was felt in some parts of china and russia as well. when you look at the potential response here, there is hard talk, but it comes down to what they will eventually do as they start this round of concern. how do you see china and russia reacting? >> obviously this came while china was having an important meeting, the second time that north korea has had this kind of provocation while there is an important meeting and china, so it looks like north korea is trying to send a signal to china that we have developed these weapons or say we have and that it will be hard for you to stop us. the u.s. of course is calling not only for tougher sanctions

on north korea, but for others who have been aiding this program who have not impose sanctions, including russia and china, to do so now. frankly, the u.s. sanctions and united sanctions that united nations sanctions have not done a lot as oil continues to go to north korea. china has not been willing to do that. betty: what are the chances that president trump and the white house will now take it out on trade and the trade pacts? president trump threatening to pull out of the korean free trade agreement. what is the likelihood of this and even a trade war breaking out in order to get the message across on north korea? >> the south korea trade issue is interesting because it appears to be coins a dental. he has obvious he pulled out of the tpp with the pacific

countries and has had tough trade talk with other countries, but this appears to be coins a dental for south korea. like that trade pact, but it does not appear to be a strategic move involving north korea, and the comments that seem to be directed to china and russia seem to be a separate issue, but it certainly puts a lot of pressure on south korea and president moon. , how doessident moon this change in strategy in looking at the north? thend campaign on what was a call to have better relations with the north. >> the big question is does this cross the red line. it has been murky up until now. this yeare earlier

that if in fact north korea is able to decoy or attach a nuclear warhead on an icbm, that potentially changes the stakes here and does cross some crucial lines. the president and the conservative party he represents still urging for peaceful talks, although the room for diplomacy they say is waning of it. to jump on the back of jody's comments on the trade deal, it may be coincidental, but a lot of experts are saying that this is the last thing president trump should be worried right now, bringing up the trade issue and complicating relations with south korea. it seems like he saved a lot of the harshest criticism for its allies, which is strange in itself, but this is essentially what pyongyang wants, the souring of relations between key diplomatic allies. we have to leave it

there. now, looking ahead on the show, ic's summit and the fallout from north korea's latest provocation. betty: next, fitch's global head of sovereign ratings looking at whether this will force a recalculation of sovereign risk. this is bloomberg. ♪

♪ betty: ok, that is a live shot right now of seoul, korea. business as usual, at least on the surface. influenceot so much as usual in the markets in south korea.

gettingeeing the kospi hit, but now recovering from the lows of the session. 1% afterng lower by the latest and harshest provocation from north korea. this is "daybreak asia" in new york. david: those tense and the s in thend -- tent background, there is still a fashion show taking place, so underscoring the fact it is still business as you will -- as usual. we are joined now by fitch ratings. they say when you look at tensions on the peninsula, currently higher than other recent flareups, the situation has become more uncertain. we are joined i the global head of sovereign ratings, james mccormick here it thank you for coming on. -- james mccormick.

thank you for coming on. it is difficult to quantify how this changes the risk profile. was there anything on the weekend that might prompt you to have a second look at south korean now? from a ratings perspective. we have have this factored in for a long time. if you look at fiscal performance growth, external finances, it would be rated higher than where it is today where it not for north korea. we have a aa minus rating, the wehest in north asia, and set the rating would be higher if it was not for north korean risk. not the risk of a conflict, we still believe that is low, but the risk of unification costs somewhere down the road, which would he very high. factor that into what is otherwise a good set of numbers results in the one notch adjustment for the rating. david: what metrics are you looking at? we got something very ankara

uncharacteristic with the finance ministers saying the potential impact on markets could be more than transitory. that's something we usually don't hear from regulators. your thoughts on that and what are you watching? >> the impact on the economy is already there. two quick examples, one would be the difficulty korean exporters are facing accessing chinese markets now. the chinese authorities are clearly concerned about this missile umbrella that the u.s. is installing and south korea, so that has had an impact and there are economic implications. the other are chinese tourists into south korea, which are holding back, and again because of the geopolitical issues, so there are real economic implications already, and from a ratings perspective, we are concerned about those medium-term potential cost issues. david: and what you mentioned earlier, the models would be

rated higher if it were not for what was going on. >> it is a notch we have taken offer sometime in south korea. david: let's talk about china. ist everyone can agree on that there has been a buildup of look especially when you at corporate leverage outpacing growth and income and output. whether thatbating is manageable and sustainable. what do you think? >> it depends on what time frame you look at. it is manageable for the short term, but debt cannot grow faster than income by definition , so at some point it needs to be resolved. the bigger short-term issue is leverage within the financial sector itself. that is something we see regulators zero in on on the last 12-18 month, coming right from the top and the president himself, so that has become a bigger priority and the bigger short-term partisan corporate debt. david: would you say they have

made progress? when you look at the balance sheets of these chinese banks, the credit has something been transferred there. i'm wondering what you think the progress is given all the talk? >> it is pretty limited in terms of progress so far. the death continues to grow faster than income, maybe at ace lower pace, but still growing and there is limited progress to date. focusing on leverage within the financial sector has shown some promise. the outflow situation seems to have stabilized. can put up the possibility that you will downgrade china? >> i don't think the capital outflows are the trigger to a ratings action. the debt issues and whether that washes up on the sovereign balance sheet is more important. external flows, china has a

strong external balance sheet in foreign-exchange reserves or so thesked that's, adjustment from foreign-exchange reserves to other assets should not give us that much cause for concern. in terms of capital outflows, where is the dollar going? as the dollar has been weakening, capital outflows seem to have slowed down a bit in addition to the measures the government has taken, but that in itself is not something that will move the rating. david: we have to leave it there. that is all we have time for. , head ofcormack sovereign ratings that fitch. plenty more to come. you are watching daybreak asia live out of hong kong. this is bloomberg. ♪

♪ betty: let's get a quick check of the business flash headlines. taking control over one of the oldest private banks in europe. paying 1.8ings

billion dollars for a 90% stake of bank international luxembourg held by precision capital qatar. founded in 1980 six and has assets fight at more than $45 billion. legend also controls a buyout firm and a developer. one of the companies affected by china's crackdown on foreign yields says it's plans to not clash with the new rules. continues to expand come up focusing on sectors the government says are acceptable. the copresident says beijing has endorsed the two most recent acquisitions. others are also under scrutiny. commonwealth bank of australia has named the new south wales treasury court rob whitfield as an independent nonexecutive director. the bank has announced the retirement of two directors and may at a third within the next 12 months. the austrian financial review

says the appointment would not preclude him from succeeding the cba's next ceo. next, japan's response to north korea. this is bloomberg. ♪

♪ there's you can see, it is a clear day, quite a run a given developments on the weekend. the south korean capital. markets have already come off the low, the impact might be transitory. coming out from the yonhap news agency that according to a report citing the environment ministry in south korea that the country has conditionally approved the environment for the thaad missile system.

very interesting what is happening so far. betty: absolutely. increased provocations havenorth korea, there been concerns about the environment will impact of this missile system and the worry that this will inside north korea more to continue to escalate tensions with their neighbors as well as the u.s. atthe meantime, let's look how all this is affecting the asian markets and how they are shaping up so far this morning. we have seen pretty much risk off. the south korean iron ore falling 1.5% at the open. sophie: we did have the kospi sliding over 1% common noun down by .9%.

1%, nowmind -- over down by .9%. markets tend to recover quickly. fell assday, the kospi much as 1.6 percent before recovering most of those losses. the question is if north korea is getting closer to our redline for the united states, china, or south korea. we have losses continuing in tokyo and sydney, and the korean won above that key level, down .1%. the first level of resistance for dollar-won could be the 200 day moving average. gains, has pared earlier gapping lower from the friday close. other haven assets, the swiss franc, and gold at the highest level since september 2016. we have a mixed picture when it comes to the bond space.

korean debt on the back foot along with jgb's, the tenure falling below 0%. -- the 10 year falling below 0%. we do have the dollar under losinge this morning, ground against all g10 peers except for the aussie, down .2% today. the aussie finding itself sold against the yen this morning, fade,ould the tensions the aussie could had higher especially given firm or commodities prices, and today a mixed bag when it comes to the commodities space. oil on the back foot, metals looking higher. know what isve to happening the world when you have the swiss franc in the japanese yen topping that list. thank you for that update. let's get to first word news. haslinda: nafta talks resume in mexico city monday.

the u.s. and canada want better wages and conditions for mexican workers, to reduce the number of people heading north, and eliminate the incentive for companies relocating south. are roughly as quarter of their counterpoints in the u.s.. a new bloomberg survey expects mario draghi to address the strength of the euro later this week. he declined to mention the issue at jackson hole last week, but two thirds of economists we asked said he would do so on thursday. 13% surge against the dollar prisons ecb officials with the challenge understanding why the broader economy has failed to generate inflation. has wonor angela merkel the debate in the upcoming german elections despite being on the defensive most the time. spoke on ther

refugees and worsening diplomatic relations with turkey but failed to land any meaningful blows. polls by the state broadcaster gave the chancellor to win, but almost half of voters remain -- undecided. it we will bring you the latest political and market analysis in the run-up to the election. man who predicted that 2008 financial crisis also forecasts the damage caused by the rupee banned in india. he was asked about demonetization when he was still r.b.i. governor in february last year. in a new book, he said he saw potential long-term benefits, but felt the short-term economic hit would outweigh them. he also wrote he made his view known in "no uncertain terms are co--- terms are co-

," global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. betty: our china correspondent tom mackenzie is there for more, and as you have been saying for northst few hours, this korean nuclear test is a slap in the face to president xi jinping , who is hosting these leaders, really losing face here amid his talks with counterparts. that's right. there aren't many countries that could so brazenly undermined the chinese leadership. north korea willing and able to do so. the second time that president xi jinping has been holding a summit when the north koreans fired a missile, in this case a nuclear weapon.

he is hosting the leaders of brazil, russia, and south africa here in china. three of those countries, russia, india, and china, the top three trading partners for north korea, but this is a set he's event. reportedly for xi jinping to get across a message internationally and domestically that he is in control and has deft handling of foreign affairs. many would say that the north korean issue is an example of foreign-policy failure from the chinese perspective, and this test rams at home. the chinese condemned this test and call for north korea to abide by the security council resolution and said these were wrong actions and called for more talks. in terms of the actions we may see from china, that is still up for debate and something we have to keep an eye on. we heard state media saying further sanctions may be inevitable.

other china watchers say that the government now is moving to the position where they think that sanctions simply will not work. on thed abide and vote latest round of sanctions, but continue to supply significant amounts of fuel and food aid to north korea. the debate is whether china national petroleum corporation will cut those exports. that is the question now, what china does from here in terms of action. an analyst on earlier who said the u.s. should be doing much more to pressure including freezing the financial assets of chinese banks. viable avenuesl, to put more pressure on china? well, there are a number of analysts who say that is viable. washington, the white house,

have stepped up this potential investigation and put sanctions on small entities in china. inis now being considered washington that they may start to pressure some of the state owned enterprises, financials, energy companies. isl bishop has said that something the u.s. should consider doing, but beijing has been pretty open about its stance, saying it would hit back with its own trade sanctions if washington was to go down that route. everything from u.s. soybean imports into china, iphones, to boeing airplanes, so it could result in further trade tensions between beijing and washington. the risk.early president trump saying he was looking at canceling any trade effectively with any country that trades with north korea. includeld of course china, north korea's largest trading partner. it seems pretty unviable on

proposition that the u.s. would stop trading with china over this issue, but it is the economic pressure point that washington seems to be looking at now. we heard that from stephen mnuchin the sanctions plan to the white house. agree i guess we can all that a lot of this will be more simple if we were simply talking about two parties with a relationship with one another. complexity has to do with these intertwined relationships, trade and political. what does this all mean for china's relationships within the asia-pacific? it is very complex. we have seen china's anger over south korea getting ready or making moves to deploy this thaa d missile defense shield. it sees that as of potential pressure point that south korea and the u.s. could use on china,

it's concern about the military implications of that for chinese military assets here it china has -- assets. it becomes a more difficult argument for beijing to make when north korea continues to step up its nuclear program and nuclear testing. you have the fact that south koreans are looking to the u.s. for greater military ties and assistance. a pacifiste is constitution, but there are moves now within japan and calls from nationalists to take a harder line and maybe take a closer relationship with the , something china does not want to see come so that is a conundrum, and domestically and china, there are splits as well. there are old cadres who remember the relationship with , then there are the

reformists who say china should be stepping back from is erstwhile ally and it so-called ally in north korea given what has happened and the implication it has potentially for china's economy. we have to leave it there. that was tom mackenzie, our man on the ground at the brics summit in china. about tokyo and washington reaffirming their ties, president trump pledging america's commitment to japan. i want to bring in our asia editor.nt and thei nice to see you at what is president trump mean by this word "commitment."? >> absolutely. since the missile tests last tuesday, trump and prime minister abe has spoken about four times on the phone about this commitment, also the need

for more sanctions, etc. it is a treaty signed after world war ii that commits u.s. troops to be stationed in japan, but basically the biggest thing for japan is that it puts japan under the u.s. nuclear umbrella, anyeassuring japan of potential attacks from aggressors. betty: japan has joined this call on an emergency meeting of the united nations security council. nikki haley tweeting about this on the weekend. what this japan one out of this meeting? the they want out of the relations and negotiations between the u.s. and japan and south korea and china? always afteran as these missile tests or nuclear tests or whatever call for

stronger sanctions. last week, there was talk that japan and the u.s. pushing to impose an oil embargo on north korea. at the united nations security council will oppose this. it is not want to see the collapse of the north korean state, which in oil embargo could hasten, but then again china has also talk potentially about some kind of partial ban on oil exports to north korea, but it is the oil that japan wants to focus on. there will beely more options to be discussed. sharp in tokyo. of next, more market reaction and analysis on the north korea nuclear test. numeral says risk will be elevated because of trump's inexperience.

this is bloomberg. ♪

♪ this is "bloomberg markets: asia." our top story, the rising tensions bark by north korea's latest nuclear test. guest says chances of conflict remain low, but tensions surrounding the u.s. china relationship is increasing. s chief economist saying this is going to have an this is notact going to be a transitory situation. it is different than what we have been hearing from investors saying that this is going to be more of the same in terms of the reaction. where do you stand on this? thet depends on how

military situation plays out, but also how policies play out. we are thinking as many that the risk of military conflict , but this does open up a lot of issues regarding what the trump administration may do with regards to south korea, japan, and china. betty: what you think the trump administration might do? >> let's take those three countries in turn. korea, the trump was talking the free tradeng agreement between south korea and the united states. we now think the probability of that has then greatly reduced. japan is another country that the trump administration often talk about trade during the campaign. conflict heightened and the priorities emerging, we also think that policy towards japan will be put aside. in the opposite direction though

will be risks about policy towards china going forward. , but still very early on we will have to see. be surprised if the trump administration imposed more sanctions against companies that do business with north korea, and they could very well be in china. becomes the status quo that north korea has nuclear capabilities with their icbms, then i do think this increases the chance that the u.s. will be more aggressive on intellectual property issues than recently discussed, steel and aluminum as well. talking withe just tom mackenzie about the different levers that the u.s. could trigger in order to pressure china even more. what do you think that the u.s. could do on china? you mentioned a few right now,

but what are the likely scenarios in order to put the pressure on china to act? >> the levers they united states somewhat limited. the trump administration has learned that. more importantly, one of the big tensions when we are thinking about washington dc and president trump has been the difference between his rhetoric on trade and foreign relations and what he has actually done. if you look at his rhetoric, he is very aggressive and was going to label china a currency manipulator. during thebout campaign about imposing tariffs of 45% on chinese goods, partly because the bilateral trade deficit with china is so large. in the first seven months of his presidency, he has been somewhat stayed in his approach, stayed somewhat conservative relative to his rhetoric. thisrth korea does become

nuclear power and that is the status quo, there is a risk that the true trump about trade may emerge in the months and years to come. david: we were talking with fitch about 20 minutes back, essentially saying that we are already seeing the impact when it comes to south korea. the issue of north korea has been around for decades, so it what southdivorce korea would look like in the absence of that perennial risk. tangible absence pex in southke ca korea? >> not so much. one of the things we will look is, if you look at asia's economies, they have been doing very well. that is a risk going forward.

if you look at this is sentiment around the globe, it has in very high. because of the situations where there is this added uncertainty, how will that didn't translate? we have not seen it yet, but it could happen. david: we have seen a lot of central banks tilt towards easing or remaining fairly accommodative. does this mean lower for longer? >> does this really affect as you were talking about the capex or overall economic outlook is the question. one way to view the asian economies, north american economies and europe as well, you look at central banks around the world, they are becoming tighter. start unwinding the balance sheet and start tapering in europe. japan has posted some strong growth numbers recently. you have this pattern of relatively strong growth in good

economic performance. we look at north korea, is that a blip on the radar or will it be something more systemic? onfar, it looks like a blip the radar that has a lot of risks associated with it, but the fundamentals around the world ready good. go, we also had headlines a few moments ago from the environmental ministry in saying that south korea has conditionally approved d system and that it has passed the environmental assessment. ahead, and it looks like it is, what impact will that have on south korea and the region, particularly economically? >> that me answer question from the u.s. perspective first. one element the north korea situation will highlight is there will be greater defense

spending in japan and in the united states. the japanese have been talking about increasing their antimissile defenses, and the u.s. will play a larger role in defense in the general area to its partnership. a communiqué was released between, the phone conversation between president trump and premise ro -- prime minister of a, talking about their mutual commitment. when it comes to this general area in defense, i think we will see these north korean events make the u.s., south korea, and japan form an even stronger bond around this issue. david: thank you. we have to leave it there. thank you for coming in on the stormy monday morning. -- this stormy monday morning. right, you can get a roundup of the stories you need to know to get your day going in today's issue of daybreak.

a picture obviously tell you more than a thousand words. on yourdayb terminal, and it is also they've on the bloomberg anywhere app, where you can customize your settings and get what you need and relevant to you. this is bloomberg. ♪

♪ david: that is almost it for us here on "daybreak asia." what are we watching, rish? >> north korea, north korea, and north korea. our guest who studied north korea will be a in about 15 minutes time. looking at the russian perspective. joined from the brics summit. betty: that is it. this is bloomberg. ♪

♪ rishaad: :00 a.m. in home:: 9:00 em in new york city. i am rishaad salamat. geopolitical tensions of their horizons the cuban missile crisis. washington promising an overwhelming attack. china and russia calling for jaw jaw, not more war. rishaad: expansions it's lands do not violate