Investors seek safety as North Korea tension escalates; stocks end off lows

Xavier Trudeau
Août 12, 2017

The benchmark FTSE 100 was down 55.94 points at 7,442.12 in morning trade, as a raft of firms going ex-dividend weighed on the index.

Spot gold rose 0.5 percent to $1,266.20 per ounce at 0054 GMT.

"We've had such a period of low volatility in the markets, coupled that with high valuation, it only takes a bit of a wobble to cause a reaction like we've seen", Jonathan Roy, advisory investment manager at Charles Hanover Investments, said, adding that the reaction was still quite tepid by historical standards.

Trump's comments followed reports that North Korea had successfully produced a nuclear warhead that could be fitted inside its missiles.

"Of course it's all come at a time when share markets are due for a correction so North Korea has provided a ideal trigger".

Apart from the war of words between North Korean Leader Kim Jong Un and Mr. Trump, the market faces fresh uncertainties from central banks and politicians in the second half of 2017.

As of 0730 BST, the Shanghai Stock Exchange's Composite Index was off by 1.54% to 3,211.49 and South Korea's Kospi by 1.69% to 2,319.71.

In currency markets, the Canadian dollar was trading at an average price of 78.71 cents United States, down 0.20 of a USA cent.

Chinese bluechips lost 1.6 percent, while Hong Kong's Hang Seng was 1.9 percent lower.

Investors have been jittery about North Korea since Tuesday when Trump said any threats from Pyongyang would be "met with fire and fury like the world has never seen". U.S. Defense 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".

Another consideration is that numerous market participants that are holding these huge short volatility positions are systematic trending following hedge funds. The index closed at 16.04 overnight, the highest level since November 8, when Trump was elected president.

The Chinese volatility gauge jumped by the most since January 2016 to its highest level in more than seven months.

The index was showing signs of Greed just two days ago while the Dow was in the midst of a winning streak that included nine straight record highs.

The CBOE Volatility Index, the most widely followed barometer of expected near-term USA stock market volatility, rose the most in about 12 weeks. In effect, a 3.5% sell-off in the S&P 500 could result in a 15 percentage point spike in the VIX index, which in turn would set off a wave of panic through financial markets.

The dollar slipped to 109.04 yen from 109.26 late Thursday.

The yield on US 10-year Treasurys slid to 2.199% Friday from 2.211% Thursday. The greenback was down 1.1 against the franc, its worst drop in more than six weeks.

The dollar index, which gauges the greenback against the currencies of six major United States trading partners, was last 0.2% down on the day during afternoon European trading hours - it stood at 93.20.

The dollar weakened after news that USA producer prices unexpectedly fell in July, recording their biggest drop in almost a year and pointing to a further moderation in inflation that could delay a Federal Reserve interest rate increase.

Among economic data, the U.S. Labor Department is likely to report that initial jobless claims remained unchanged at 240,000 for the week ended August 5.

United States gold futures for December delivery was mostly unchanged at $1,290.50 per ounce.

Twenty-First Century Fox Inc was down 2.65 percent following quarterly revenue that fell short of expectations.

U.S. crude oil crude futures edged up 10 cents to Dollars 48.69 per barrel. The Dow slid 33.08 points, or 0.2 percent, to 22,085.34. Regions Financial shed 23 cents, or 1.6 percent, to $14.07.

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