- MSCI world share index falls for third day on N.Korea tensions
- Wall Street digests higher jobless claims, weaker PPI
- Demand for yen, gold remains
- Benchmark 10-year Treasury yield near 6-week low
- Kiwi dollar dives as RBNZ chief gives intervention promise
World stocks fell for a third day on Thursday and investors moved back into the Swiss franc, yen and gold as North Korea ratcheted up tensions with the United States with a threat to land a missile just short of the U.S. territory of Guam.
Markets had seen a tentative recovery in risk appetite in U.S. and early Asian trading, but as the war of words resumed Asian stocks dropped back and London, Frankfurt and Paris all lost 0.5-1.2 percent.
Futures markets were also pointing to a lower start for Wall Street, where missile makers have been the only significant gainers in recent days. Traders there were also digesting a rise in jobless claims and the biggest drop in producer prices in 11 months.
Currency traders consolidated positions in the Japanese yen and Swiss franc, and nudged up the dollar index by unwinding some of the recent big bets on the euro.
Although Japan could be in the front line of any clash with North Korea, the yen is benefiting because Japan is the world’s biggest creditor nation and Japanese investors tend to repatriate funds in times of stress, attracting other flows.
The euro was down 0.4 percent at just over $1.17 and nearing a two-week low, while the New Zealand dollar tumbled a full 1 percent as its central bank head bluntly said he wanted it lower.
“We saw a tentative recovery in risk appetite yesterday from the sell off inspired by North Korea but I think justifiably that move is fading a little bit today,” said Saxo Bank’s head of FX strategy John Hardy.
“I think this situation is more critical that the market is respecting.”
Overnight North Korea dismissed as a “load of nonsense” warnings by U.S. President Donald Trump that it would face “fire and fury” if it threatened the United States.
It also outlined detailed plans for a missile strike near Guam, which is more than 3,000 km (2,000 miles) to the southeast of North Korea and home to about 163,000 people, a U.S. Navy base that includes a submarine squadron and an air base.
“Sound dialog is not possible with such a guy bereft of reason and only absolute force can work on him,” a report by the North’s state-run KCNA news agency said of Trump.
With the rhetoric rumbling on, Europe’s top-rated German bond yield held near six-week lows. U.S. and British equivalents were also trading a touch above Wednesday’s six-week lows.
Analysts said yields, which move inversely to prices, could fall further if the geopolitical tensions continue to rise — even if central bankers in the United States continue to talk of raising interest rates or scaling back stimulus programs.
“We would currently be careful with a whiff of risk aversion in the air and, by extension, also stay away from shorts in the rates market,” RBC’s global macro strategist Peter Schaffrik said.
GOLD, IODINE, MISSILES
The market’s main backstop in times of strain, gold, hit a two-month high of $1,282 an ounce amid the nervousness.
It was not only the threat of conflict with nuclear-ambitious North Korea. A U.S. Navy destroyer sailed within 12 nautical miles of an artificial island built up by China in a challenge to Beijing’s territorial claims, officials told Reuters.
Steel and copper prices stayed strong in metals markets. Oil also regained momentum as data pointed to declining U.S. inventories. Brent crude was up 80 cents at $53.50 a barrel and U.S. crude was up 60 cents and back up to $50.
There have been some markets which have benefited from the U.S.-North Korean saber rattling.
Missile makers Raytheon and Lockheed Martin have outperformed Wall Street by almost 4 percent in recent days and the Dow Jones U.S. defense index is at a record high and on a seven-day unbroken run of gains.
Sociedad Quimica y Minera de Chile, one of the world’s largest producer of iodine — a substance used to combat radiation — has seen its share price increase by over a third since the start of July.
“Most investors will be completely out of their depth in making any assessment on the (North Korea) situation,” said Koon Chow, emerging market FX strategist at fund manager UBP. “Therefore one shouldn’t make a big call.”