NEWS & MEDIA

Effects of America and North Korea’s Sabre Rattling

31 August 2017

Global financial markets witnessed a jolt in the second week of August amid escalating military tensions between the America and North Korea.

America and North Korea’s sabre rattling unsettles global financial markets

The war of words between America and North Korea roiled financial markets across the globe, prompting investors to adopt a risk averse approach. In fact, markets suffered a double blow later that week after Mr. Trump ramped up his rhetoric against North Korea, warning that “US military solutions are now fully in place, locked and loaded.”
The Wall Street’s so-called “fear gauge”, the CBOE Volatility Index (VIX), surged to a level of 16.04, its highest reading since May this year.  Listed below are the gainers and losers from this acrimonious exchange of words.

CBOE Volatility Index (VIX)

America and North Korea Sabre Rattling - CBOE Volatility Index

Gainers

Military tension between America and North Korea sent investors to seek solace in safe haven assets such as the Swiss Franc, Japanese Yen, gold and Government bonds.

Swiss Franc

The Swiss Franc resumed its traditional role as a safe haven currency during the second week of August, causing both the EUR/CHF and USD/CHF pairs to turn sharply lower.

America and North Korea Sabre Rattling - Swiss franc

Japanese Yen

The Japanese Yen, another regular in the safe haven space, ended amongst the best performing G10 currencies that week, although it played second fiddle to the Swiss Franc in the end.

America and North Korea Sabre Rattling - Japanese Yen

Gold

Gold, which tends to perform well in times of global unrest, was also up. Gold prices edged up towards $1,300 per ounce, its highest level since early June 2017.

America and North Korea Sabre Rattling - Gold

Government Bonds

Investors appeared to be moving their money into the relative safety of bond markets.  Yields on 10-year US Treasuries, as well as British and European bonds, which moves inversely to price, were lower.

Losers

All this overwrought rhetoric caused stock markets to tumble on 9th August, as investors shifted their money. US stocks ended lower, tracking declines in Europe and Asia. The prospect of hefty losses on Wall Street was averted however, after the US Secretary of State, Rex Tillerson, told Americans that there was “no imminent threat of war”.

America and North Korea Sabre Rattling - Stocks and Shares

Where are we now?

Trump has since attracted substantial reproach from across the globe for shying away from the steady, predictable and calm leadership that American allies usually seek from Washington. It is worth noting that North Korean threats are an annual August feature, as the US conducts joint military exercises with South Korea, which Pyongyang views as a direct threat. While the conflict between the two countries remains a war of words at present, markets are wary that the threat could escalate, given the unpredictability of the two leaders.

North Korea’s recent missile launch over Japanese territory ratcheted up the tensions again between the two nations and triggered another bout of risk aversion among investors.  Once again, it initially raised demand for safe-haven assets, with gold, Japanese Yen and the Swiss Franc posting considerable gains.  However, the market reaction was not as strong this time, and global equities rebounded from their earlier losses, indicating that they have become accustomed to this kind of provocative behaviour from North Korea.

Nevertheless, with US President Trump stating that “all options are on the table” and the Japanese PM calling the missile test a “serious threat to the national security”, it seems that tensions on the Korean Peninsula are coming to a crux.  Investors will certainly be hoping that America and North Korea’s sabre rattling is nipped in the bud and the two nations come together for a diplomatic dialogue.

 

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