Rebound From Korea Fury Sees Equities Beat Credit as Yen Slumps

(Bloomberg) -- Some market rebounds are proving more impressive than others as investors reverse bets made last week when tensions surrounding North Korea spiked.

Key Event Triggers

• Aug. 7: Global equities, as measured by the MSCI All-Country World Index, close at an all-time high
• Aug. 8: The Washington Post reports Pyongyang has developed a miniaturized nuclear warhead that could fit onto its missiles
• Aug. 8: President Trump says further threats from North Korea would be met with “fire and fury”

Among the first securities to react were gauges of stock-price volatility. In Japan, the Nikkei Stock Average Volatility Index surged 28 percent last week, before returning to 15.25 as of midday in Tokyo on Tuesday, below this year’s average of 16.5.

The MSCI All-Country World Index is rebounding from its biggest weekly slump since the start of November. The measure of global equities is now within one percentage point of the all-time high it hit earlier this month.

Investors have been loath to get overly bearish, with people selling assets last week worried about missing out on the ensuing rebound, according to Mark Matthews, managing director and head of Asia research with Bank Julius Baer & Co. in Singapore.

“‘OK, I’m going to sell my stocks, I’ll take my 10 percent’ but then what do I do?” he asked. “That’s the issue. They can keep it in cash for a while, but cash provides you so little and so do bonds, really. So that’s the conundrum that people face. I can sell my stocks but then what do I do with the money?”

In foreign-exchange markets, notable rallies kicked off in the yen and the Swiss franc, which typically offer a place of refuge during times of heightened global tension. Gold also surged on demand for safety. Those moves are unraveling this week, with outperformers turning into underperformers.

One standout winner this year, emerging-market equities, took a bigger hit last week than the S&P 500 Index, which has returned about half that of its developing peers over the course of 2017. The rebounds have so far been of similar magnitude.

The selloff in lower-rated credit has been less forgiving. Spreads for high-yield corporate debt and U.S. dollar emerging-market notes remain elevated, while those for the global credit benchmark outperformed.

To contact the reporters on this story: Adam Haigh in Sydney at ahaigh1@bloomberg.net, Eric Lam in Hong Kong at elam87@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Garfield Reynolds, Andreea Papuc