Sep 5, 2017

Markets tumble in wake of North Korea nuclear threat

Marc Jones, Reuters

This Aug. 29, 2017, file photo distributed on Aug. 30, 2017, by the North Korean government shows what was said to be the test launch of a Hwasong-12 intermediate range missile in Pyongyang, North Korea. , Korean Central News Agency/Korea News Service via AP, File

Risk appetite started to slip again on Tuesday, with modest falls for Wall Street’s main markets as they reopened for the first time since North Korea’s biggest nuclear missile test yet.

U.S. stocks sank on Tuesday, with the S&P 500 stumbling to its biggest single-day loss in about three weeks.

The Dow Jones Industrial Average fell 234.45 points, or 1.07 per cent, to 21,753.11, the S&P 500 lost 18.62 points, or 0.75 per cent, to 2,457.93 and the Nasdaq Composite dropped 59.76 points, or 0.93 per cent, to 6,375.57.

Europe’s markets were being dragged back too, with stocks cutting their morning gains in half and investors shifting into bonds and the yen in fixed income and currency markets.

But as with many political risk plays over the past couple of years, the limited size of the moves suggest that investors were focused more on the upbeat picture of the global economy rather than on pricing in tail risks on every possible bad outcome.

Confirmation that euro zone business activity remained robust last month had helped the pan-European STOXX 600 claw back some of the ground lost on Monday amid international condemnation of the previous day’s nuclear test .

Gold - the traditional go-to for traders when political concerns escalate - eased too, dipping back from a one-year high in its first drop in four days.

“What the recent (North Korea) episodes have shown is that you should not really try to follow these things as they tend to fade quickly,” said ING’s chief EMEA FX and rates strategist, Petr Krpata.

“It is less and less surprising for markets every time, so for us it is not a reason to change our constructive view on carry currencies.”

Among the major currency pairs, the euro tiptoed back up to US$1.19 as signs of rising inflation pressure in the earlier euro zone data put the focus back on Thursday’s European Central Bank meeting and its plans to reduce its stimulus programme.

Cautious sounding comments from a Federal Reserve policymaker then knocked the dollar lower, taking it to a one-week low of 109.16 yen as U.S. trading gained momentum.

GLOBAL CATASTROPHE

Overnight China’s Caixin/Markit services purchasing managers’ index (PMI), a forward-looking economic indicator, 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 per cent gains but Seoul and Tokyo remained red.

South Korea’s Asia Business Daily, citing an unidentified source, reported that North Korea had moved what looked like an intercontinental ballistic missile (ICBM) towards its west coast, possibly in preparation for a launch.

Seoul said it had struck an agreement with the United States meanwhile which would allow it to beef up the size and potency of its warheads.

Speaking at a summit of the world’s biggest emerging economies in China, Russian President Vladimir Putin again warned though 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.

There were some sharp moves in commodity markets.

U.S. WTI oil prices raced higher, while U.S. gasoline prices slumped to pre-Hurricane Harvey levels, as oil refineries and pipelines in the U.S. Gulf Coast slowly resumed activity, easing supply concerns.

U.S. West Texas Intermediate (WTI) crude futures jumped 2.6 per cent to trade at US$48.50 per barrel, and global benchmark Brent prices climbed 1.68 per cent to US$53.18.

The reassuring China PMI data helped copper hit a three-year high in industrial metals markets, and nickel hovered near a 14-month peak.

Meanwhile, bitcoin dropped further from Saturday’s all-time high of US$4,979.9 to trade at US$4,012.

China said on Monday it was banning the practice of raising funds through launches of token-based digital currencies, known as initial coin offerings (ICOs).