Geopolitical tensions came back to haunt markets today after North Korea fired an unidentified ballistic missile over Japan. The missile flew over the northern Japanese island of Hokkaido before falling into the Pacific. This was the first missile to pass over Japanese territory since 2009 and comes after North Korea recently backed down from its threat to strike the US military installation in Guam in the Pacific Ocean earlier this month.
The latest provocation has reignited fears of a serious escalation of tensions between the United States and North Korea, raising the stakes to a new level. Although some reaction from the North was expected to the recent UN sanctions and joint military drill currently underway between the US and South Korea, today’s actions could prompt a tougher response by President Trump. Military action seems unlikely at this point but not totally improbable. The Japanese government would likely be supportive of a US-led military response, though the new South Korean President is seen as favouring dialogue as long as that remained an option.
Gold was the biggest gainer from the latest flight to safety caused by today’s strike. The precious metal jumped more than 1%, reaching a 9½-year high of $1325.94 an ounce in European trading. Exasperating gold’s gains has been broad dollar weakness on fading expectations of a third rate hike by the Fed this year. The combined effect has pushed gold into oversold territory according to many technical indicators, so further gains in the near term may be limited.
In forex markets, the dollar fell to a 4-month low of 108.25 yen, while its broader measure, the dollar index, slid to its lowest since January 2015, tumbling to 91.62. The possibility of conflict involving Japan failed to deter the safe-haven yen (although it did hurt the Korean won). The Japanese currency was also up sharply against the Australian dollar and the pound, rising by around 0.5% to 86.51 and 140.54 respectively. The Swiss franc posted even larger gains versus the greenback, surging by more than 1% to a two-year high. The dollar was last trading at 0.9435 francs, not far from its session low of 0.9428 francs.
Stocks were also hit by the latest bout of risk aversion, with European bourses following their Asian counterparts in negative territory. The pan-European Stoxx 600 index was last trading 1.4% lower at 367.22
