Stocks Fall as Korea Tensions Flare; Dollar Drops: Markets Wrap

(Bloomberg) -- Stocks fell, while gold and the yen climbed as geopolitical tensions flared again, with U.S. President Donald Trump weighing new economic sanctions that could target China after a nuclear test Sunday by North Korea. The dollar dropped for a third day.

S&P 500 Index futures retreated and the Stoxx Europe 600 Index declined after a report that Pyongyang is preparing to launch an intercontinental ballistic missile. Most European government bonds advanced and the yen and Swiss franc led currency gains. Gold rose to an 11-month high. Gasoline declined to the lowest in more than a week as some U.S. Gulf Coast refineries said they plan to resume operations following shutdowns forced by flooding from Hurricane Harvey.

The White House warned any nation doing business with Kim Jong Un’s regime would be met with economic sanctions and trade embargoes, and his defense chief said the U.S. has “many military options.” North Korea said Sunday it successfully tested a hydrogen bomb with “unprecedentedly big power.” The test, the first since Trump took office, is a new hurdle for markets that have proven resilient to recent bouts of tension on the Korean peninsula.

“Expect some short-term risk-aversion trades,” Citigroup Inc. economists led by Johanna Chua wrote in a client note. “But such market moves tend to be short-lived, as typically tensions defuse quickly. So unless the global response to this test raises the probability of a military strike or North Korean regime collapse (both unlikely), this time may play out similarly.”

Some investors are choosing to hold more cash in the face of increasing geopolitical instability. Nader Naeimi, who heads a dynamic investment fund at AMP Capital in Sydney and helps manage about $110 billion, has about 30 percent of his holdings in cash, while Chicago-based Ariel Investments is holding more cash versus its target in the event a pullback creates buying opportunities.

“While today’s fall in risk assets might not be deep, the process is one of an incremental rise in market volatility,” Naeimi said. This “will culminate in a deeper-than-expected correction,” he said.

Terminal subscribers can read more on our Markets Live blog.

Among other key events this week:

• A plethora of China data is scheduled for this week. Trade figures are anticipated to show another month of solid export growth, while FX reserves probably continued to rise on stricter capital controls, robust growth and a stronger yuan, Bloomberg Intelligence said. Caixin’s China services PMI and consumer and producer price data are also out. 
• In Japan, second-quarter GDP, may be revised downward.
• The European Central Bank meets on Thursday. President Mario Draghi will express concern over the euro’s strength when the ECB meets this week, but won’t say much about his asset-purchase program’s future, according to a survey.
• Several Federal Reserve officials speak this week, including member of the Board of Governors Lael Brainard, Minneapolis Fed President Neel Kashkari, Dallas Fed President Robert Kaplan and New York Fed President Bill Dudley, who all have expressed doubt about the need for another rate hike this year. Cleveland Fed President Loretta Mester, who has argued for a gradual pace of tightening despite tepid inflation, will also talk.

And here are the main moves in markets:

Stocks

• Futures on the S&P 500 Index fell 0.3 percent as of 4:06 p.m. in New York.
• The Stoxx Europe 600 Index sank 0.5 percent. 
• Brazil’s Ibovespa advanced 0.2 percent.
• The MSCI All-Country World Index retreated 0.2 percent, the largest dip in more than two weeks. 

Currencies

• The Bloomberg Dollar Spot Index dipped 0.1 percent. 
• The euro advanced 0.3 percent to $1.1896. 
• The Japanese yen jumped 0.5 percent to 109.66 per dollar, the largest climb in more than three weeks. 
• The Swiss franc gained 0.8 percent to $0.957.

Bonds

• Germany’s 10-year yield declined one basis point to 0.37 percent. 
• Britain’s 10-year yield dipped less than one basis point to 1.05 percent.

Commodities

• Gold gained 0.7 percent to $1,335.46 an ounce, the highest since November. 
• West Texas Intermediate crude climbed 0.5 percent to $47.51 a barrel. 
• Copper advanced 0.9 percent to $3.15 a pound, the strongest in about three years. 
• Nickel advanced 1.3 percent to $12,190 per metric ton, the highest in more than two years.

Asia

• Japan’s Topix index ended 1 percent lower, while South Korea’s Kospi index lost 1.2 percent and the S&P/ASX 200 Index in Sydney declined 0.4 percent.
• The Hang Seng Index in Hong Kong fell 1 percent.
• Indexes rose in China. The Philippines’ main gauge jumped 1 percent.
• The MSCI Asia Pacific Index fell 0.6 percent, poised for its worst decline since Aug. 11.

--With assistance from Heejin Kim

To contact the reporters on this story: Jeremy Herron in New York at jherron8@bloomberg.net, Robert Brand in Cape Town at rbrand9@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Cecile Gutscher