Worries of fresh tension between Washington and Pyongyang were raised after North Korea fired a missile over northern Japan which resulted in world stocks tumbling and safe-haven assets soaring on Tuesday.
A rally in the euro to above a key level chipped in to put regional stocks on track at one point for their biggest one-day loss in 11 months and the risk-off move spread from Asia to Europe.
While Wall Street futures pointed to sharp losses at the open, the pan-European STOXX index fell as much as 1.7 percent to their lowest in six months before paring losses to trade down 1.3 percent.
Before paring losses to end 0.5 percent down, Japan’s Nikkei hit a four-month low, and before ending down 0.2 percent, South Korea’s Kospi shed as much as 1.6 percent.
“The North Korean escalation has triggered a significant risk-off move,” Alessandro Balsotti, head of asset management at JCI Capital Limited, said in his daily note to clients.
“However … observers believe it won’t be enough to trigger a material reaction from the United States-South Korea axis. It wouldn’t be surprising, then, if investors take advantage of this geopolitical fear to buy the dips.”
Remaining above a five-week low hit earlier his month on jitters over North Korea, growing turmoil at the White House and a deadly attack in Spain, the MSCI World Index, which tracks stocks from developed economies, fell just 0.1.
Resulting in a sharp escalation of tensions on the Korean peninsula, North Korea fired a missile on Tuesday that flew over Japan and landed in the Pacific about 1,180 km (735 miles) off the northern region of Hokkaido.
Firing of projectiles over mainland Japan is his first even though the Asian country has conducted dozens of ballistic missile tests under young leader Kim Jong-Un.
A rush into safe haven assets from the Japanese yen to the Swiss franc and the German bund was sparked as the unprecedented move raised worries that the crisis could further mount.
“As a tactic to force all sides to the negotiating table it is a dangerous one that could backfire,” said Irene Goh, head of multi-asset solutions for Asia Pacific and a member of the diversified multi-asset committee at Aberdeen Asset Management.
After U.S. President Donald Trump warned that Pyongyang would face “fire and fury” if it threatened the United States, North Korea threatened earlier this month to fire missiles into the sea near the U.S. Pacific territory of Guam.
“Investors should look to protect themselves,” Goh added. “The question is where to find safe shelter given how asset prices have become divorced from fundamental value… We believe the safest spot to be is not one place, but many”.
The dollar was last down 0.7 percent at 108.55 JPY and hit its lowest level since mid-April against the yen.
Because there is an assumption that Japanese investors will repatriate funds should a crisis materialize and Japan is the world’s biggest creditor nation, the Japanese currency tends to benefit during times of geopolitical or financial stress.
(Adapted from Reuters)