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Stocks bear brunt of market reaction to North Korea stand-off

Investors moved out of stocks on Friday as the stand-off between the US and North Korea set a jittery tone across global markets, with the pace of the selling at its steepest in Asia.

South Korea’s won touched its weakest level in 30 days against the dollar before finding support and Seoul’s main equities benchmark hit a three-month low, although it regained some ground.

Demand for 10-year German Bunds, one of Europe’s main financial havens, sent the yield on the debt to a six-week low, although other assets prized for their perceived safety, including gold and the Swiss franc, were largely unchanged in morning trading in London.

Investors were further unnerved after US president Donald Trump said on Thursday that he may not have been “tough enough” in his warning to Pyongyang earlier in the week when he said that the US would deploy “fire and fury like the world has never seen” if the regime continued to threaten the US.

Dirk Willer, an analyst at Citi, described the market reaction so far as “modest” but warned it could get worse. He said that with the joint annual military exercises between South Korea and the US due to start on August 21, “the market’s view is likely too sanguine in short term.”

South Korea’s main stock index fell a further 1.7 per cent on Friday, taking its decline over the week to 3.5 per cent and leaving the Kospi at a level last seen in May, although it bounced up from intraday lows that saw it down 2.1 per cent.

The Hang Seng fell 1.8 per cent in Hong Kong to an 11-session low. The Shanghai Composite was also 1.8 per cent weaker. The moves lower take the Chinese equities indices off notable highs: the Hang Seng was at two-year peak on August 8 and the Shanghai Composite touched an eight month intraday high on August 2.

The falls on Europe’s stock markets were more measured, with London’s FTSE 100 down 0.8 per cent and the Xetra Dax 30 down 0.2 per cent in Frankfurt. The region-wide Euro Stoxx 600 is down 0.7 per cent. Financial stocks were under heavier pressure, with the Euro Stoxx banking index down 1.9 per cent.

The South Korean currency traded as much as 1.8 per cent lower over the week at Won1,148.1 per dollar before it climbed back to Won1,143,5, which took it back to the flatline for the session and cut its weekly fall to 1.3 per cent.

Overnight in New York, the S&P 500 index slid 1.5 per cent — its biggest one-day drop since the last flash of turbulence on May 17 — with the weakness exacerbated by Mr Trump’s comments.

The Vix index — a gauge of expected volatility that doubles as a measure of investor fear — reached 16 per cent, its highest level since the US presidential elections last November, although it had been at its lowest levels since the 1990’s before the verbal clash.

“The current relative insensitivity to geopolitical risk is not an isolated phenomenon but has been a common feature of markets over the past fourteen years,” said Simon Derrick at BNY Mellon.

“The most compelling argument as to why markets have become so indifferent to geopolitics is that, broadly speaking, this has proved to be a winning strategy since 2003 . . . when the invasion of Iraq began. ”