Stocks rally as North Korea fear abates, yen drops

London - Asian equities extended gains and the yen tumbled as the prospect of war between the US and North Korea receded, buoying stocks from New York to Tokyo and diverting flows away from haven assets.

Stock indexes from Tokyo to Hong Kong to Sydney climbed after the S&P 500 Index surged 1%.

Measures of equity volatility tumbled in Japan and Hong Kong after the CBOE Volatility Index, known as the VIX, slumped 21%, paring some of last week’s surge.

 Federal Reserve Bank of New York Chief William Dudley signaled another interest-rate increase this year is very much in the cards and suggested the central bank will announce its taper plans next month, giving the dollar and Treasury yields a boost.

Japan’s currency, a haven in times of global tension, slumped after the Wall Street Journal characterized a North Korean media report as indicating that dictator Kim Jong UN had decided not to launch a threatened missile attack on Guam.

The report, from KCNA on Tuesday, said Kim praised the military for drawing up a "careful plan" to fire missiles toward Guam. Kim was cited by KCNA saying he would watch the US’s conduct "a little more."

In economic news, the Australian central bank shifted the spotlight back on household debt in minutes for its August policy meeting released on Tuesday.

The Reserve Bank of Australia noted "need to balance the risks associated with high household debt in a low-inflation environment" in its decision to stand pat on policy.

Markets in South Korea and India are closed on Tuesday for holidays.

Here are some key events to watch this week:

A crowded US data docket will give some indication of whether second-half GDP will outperform the first half. July retail sales are expected to rise from June, while housing starts and industrial production may be muted.

On Wednesday, the Federal Open Market Committee will issue minutes from its July policy meeting that may hold clues to the Federal Reserve’s next rate hike.

The same day, euro-area second-quarter GDP data is due. Chinese tech titans Tencent Holdings and Alibaba Group Holding are among the companies reporting results this week.

Japan’s Topix index rose 1.3% and Australia’s S&P/ASX 200 Index gained 0.5%.  Hong Kong’s Hang Seng index added 0.2% and the Shanghai Composite Index was up 0.5%.

Futures on the S&P 500 rose 0.2% as of 2:30pm in Tokyo. The underlying gauge finished up 1% on Monday, when the Nasdaq Composite rose 1.3%.

The MSCI Asia-Pacific Index rose 0.4%. The MSCI All-Country World Index closed up 0.8% on Monday.

Currencies

The yen fell 0.6% to 110.28 per dollar after losing 0.4% on Monday, when the Bloomberg Dollar. Spot Index gained 0.3%. The dollar index rose 0.1%.  The euro traded at $1.1778. The Aussie rose 0.1% to 78.59 US cents after the RBA minutes.

The central bank chose to be may cautious about its language after investors misinterpreted the record of the July meeting as implying the RBA had begun considering raising rates, sending the Australian dollar soaring.

Governor Philip Lowe told parliament last week that the "deep dive" discussion of a neutral rate could have been handled better.

Bonds

The yield on 10-year Treasuries increased three basis point to 2.25%. Australian government notes with a similar maturity saw yields climbed three basis points to 2.65%.  Britain’s 10-year gilt yield gained one basis point to 1.07% on Monday, when Germany’s 10-year bund yield rose three basis points to 0.41%.

Commodities

West Texas Intermediate crude added 0.2% to $47.61 a barrel. US government data is forecast to show crude stockpiles extended declines during a period of strong seasonal demand, trimming a glut.

The contract plunged 2.5% on Monday as fears of falling oil demand in China overshadowed news that Libya’s crude supply was disrupted. Gold sank 0.6% to $1 274.20 an ounce, after losing 0.6% on Monday.