Investors dump stocks and run to gold as tensions flare between Trump and North Korea
US President Donald Trump’s warning to North Korea and Pyongyang’s threat of possible armed retaliation drove investors away from stocks and other risky assets on Wednesday and into textbook safe-havens like gold and Treasuries.
But despite the largest percentage drop in over a month on a global equities index, US equities ended only slightly lower as healthy corporate earnings and a recent string of strong economic data enticed investors into beaten-down stocks.
Trump’s remarks on Tuesday afternoon that North Korea would face “fire and fury like the world has never seen” weighed on Wall Street and drove up the VIX “fear gauge”, or the cost of protection against a drop in the S&P 500.
The VIX closed 1.4 per cent higher but at the lowest level of the day at 11.11, after rising as high as 12.63. Even so, the close was the highest in a month.
Following Trump’s remarks, North Korea on Wednesday said it was “carefully examining” plans for a missile attack on the US Pacific territory of Guam, which is home to a large US military base.
US Defence Secretary Jim Mattis told Pyongyang it should stop any actions that would lead to the “end of its regime and the destruction of its people.”
But while most traders appeared to favour safe-haven assets, bargain seekers helped Wall Street’s three major indexes pare the day’s earlier losses.
“It’s amazing when you consider the headlines just how calm the equity markets are, how they’ve taken things in their stride,” said Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina.
“The strong global economy driven by strong earnings is really helping to minimise some of these concerns. The global economy is really on some firm footing,” he said.
The Dow Jones Industrial Average fell 36.64 points, or 0.17 per cent, to 22,048.7, the S&P 500 lost 0.9 points, or 0.04 per cent, to 2,474.02 and the Nasdaq Composite dropped 18.13 points, or 0.28 per cent, to 6,352.33.
The S&P fell as much as 0.52 per cent at its session low.
The pan-European FTSEurofirst 300 index lost 0.75 per cent and MSCI’s gauge of stocks across the globe shed 0.33 per cent.
Emerging market stocks lost 0.89 per cent. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.57 per cent lower.
Traditional safe-haven currencies including the Swiss franc and Japanese yen rose against the US dollar.
“Obviously we are looking at the increased tensions between the US and North Korea,” said Brad Bechtel, managing director FX at Jefferies in New York. “Tensions are still high and not going away at the moment. Safe-havens are bid and markets are a little uneasy.”
South Korea’s won dropped 0.9 per cent against the US dollar to its lowest close since July 13.
The Swiss franc rose 0.01 per cent versus the greenback, the most since late June, at 0.96 per dollar.
The dollar index fell 0.14 per cent, with the euro unchanged at US$1.1757.
The Japanese yen strengthened 0.08 per cent versus the greenback at 110.00 per dollar. Japan is the world’s biggest creditor country and there is an assumption that investors there will repatriate funds in a crisis. Sterling was last trading at US$1.3006, up 0.02 per cent on the day.
The Swiss franc was on track for its biggest daily gain against the euro since the Swiss National Bank removed its cap on the currency in January 2015.
Benchmark US 10-year notes rose 9/32 in price to yield 2.2494 per cent, from 2.282 per cent late on Tuesday. The 30-year Treasury bond rose 27/32 in price to yield 2.8252 per cent, from 2.867 per cent late on Tuesday.
“The most visible impact of escalating verbal threats between North Korea and President Trump comes at the long end of the US Treasury curve,” said Jim Vogel, interest rates strategist at FTN Financial in Memphis.
Oil prices rose after a report showed US refineries processed record amounts of crude in the latest week, eating into inventories. US crude rose 1.08 per cent to US$49.70 per barrel and Brent was last at US$52.78, up 1.23 per cent on the day.
Gold hit its highest level in almost two months after Trump added to the geopolitical anxiety by boasting of the strength of the US nuclear arsenal.
Spot gold added 1.3 per cent to US$1,277.15 an ounce. US gold futures gained 1.63 per cent to US$1,283.20 an ounce. Copper lost 0.39 per cent to US$6,455.00 a tonne.