Equities fall on rising tension between US & North Korea

Ivan Schwartz
August 12, 2017

That prompted North Korea to say it was considering firing missiles near Guam, a U.S. Pacific island territory.

Stocks have been coasting to new highs day after day. Trump said that further threats would be met with "fire and fury like the world has never seen". "What's happened in North Korea is enough to do that".

"I'm concerned. I can't predict a shooting war before it happens, but escalating rhetoric of this type is unsafe", David Kotok, chief investment officer at Cumberland Advisors, told CNNMoney. The S&P 500 suffered its worst open since mid-June, but closed nearly flat.

Disney shares closed down 3.9 percent as investors were skeptical of its plan to launch streaming services rather than rely on Netflix. Energy stocks also fell as crude oil prices headed lower. There were also disappointing earnings reports from Fossil and Priceline.

Gold prices have maintained a firm tone with a push to 2-month highs on Thursday as underlying demand for defensive assets remained an important feature. The closely-watched VIX volatility gauge remains low, but it's popped 21% since Monday's close.

One expert told CNBC there could be heightened risk of miscalculation over the Korean Peninsula, but market watchers suggested tensions appeared to have cooled slightly. That was the longest losing streak since 2011.

Stocks opened slightly higher in the USA after suffering a considerable correction this week as the North Korea story emerged. Japan's Nikkei 225 Index edged down by 0.1%, while Hong Kong's Hang Seng Index tumbled by 1.1%.

Old Mutual fell 2.3%.

The major European markets also saw continued weakness on the day.

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Investors are anxious that the war of words could turn into a miscalculation that spirals out of control.

"North Korea is being used as a reason to sell Japanese stocks, just as it was used yesterday in the United States", said Soichiro Monji from Daiwa SB Investments in Tokyo.

Kotok said Trump's aggressive threats are a stark departure from Teddy Roosevelt's famous approach of "walk softly and carry a big stick".

"We've seen this play before, and it usually plays out where it just goes back to the status quo", Jacobsen said.

He recommended investors hold onto cash until the geopolitical tension eases.

"However, if the rhetoric does ramp up, even without actual nuclear follow through, this could spook the market and make it hard for stock indices to rally into late summer due to the fears for global trade and global growth".

If there's ultimately no impact on the global economy and corporate profits, it shouldn't disrupt the stock market either.

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Concerns over geopolitical risks probably led investors to pare back bearish bets against the yen and the Swiss franc, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, referring to the gains in those currencies on Wednesday.

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