TOKYO (REUTERS) - Asian stocks fell and the Japanese yen and Swiss franc gained on Friday (Sept 22) after North Korea said it might test a hydrogen bomb in the Pacific Ocean and escalated a war of words with US President Donald Trump.
Spreadbetters expected European stocks to start lower amid a chill in risk appetite, forecasting Britain's FTSE to open down 0.3 per cent, Germany's DAX to open 0.2 per cent and France's CAC to start 0.05 per cent lower.
North Korean Foreign Minister Ri Yong Ho said on Friday he believes the North could consider a nuclear test on an "unprecedented scale" in the Pacific Ocean, South Korea's Yonhap news agency reported.
MSCI's broadest index of Asia-Pacific shares outside Japan handed back earlier gains and was down 0.7 per cent.
The index rose to a decade high on Tuesday, lifted as Wall Street advanced to record levels, but fell back after the Fed heightened expectations for a third interest rate hike this year.
South Korea's KOSPI fell 0.9 per cent on the latest bout of geopolitical tensions.
Australian stocks managed to advance 0.3 per cent while Japan's Nikkei slipped 0.4 per cent following a rise to a two-year high on Thursday.
"The headline about North Korea's nuclear test gave a little shock to the market," said Takuya Takahashi, a strategist at Daiwa Securities in Tokyo. "Though the market is not expecting that there will be an immediate military action, it has triggered a profit-taking opportunity since the Nikkei had risen sharply recently."
Hong Kong's Hang Seng shed 0.8 per cent and Shanghai was down 0.5 per cent after S&P Global Ratings downgraded China's long-term sovereign credit rating on Thursday, less than a month ahead of one of the country's most sensitive political gatherings, citing increasing risks from its rapid debt build-up.
The US dollar dropped 0.6 per cent to 111.785 yen, pulling away from a two-month high of 112.725 touched on Thursday when US yields spiked on the back of the Fed's hawkish stance.
The 10-year Treasury yield declined about 3 basis points to 2.251 percent as risk aversion favoured government bonds. It had risen for nine consecutive sessions prior, brushing a six-week high of 2.289 percent.
The Swiss franc rose 0.2 per cent to 0.9687 franc per dollar. The yen and franc are often sought in time of broader risk aversion.
Safe-haven gold ticked up, with spot prices up 0.5 per cent at US$1,297.11 an ounce, after marking its lowest since Aug 25 at US$1,287.61 in the previous session on a firmer dollar.
Apart from geopolitical risks, the focus was on how the region's markets would fare when the Federal Reserve takes a step towards normalising monetary policy, as it projected on Wednesday following its policy meeting.
"It is difficult to pass a verdict on the Fed's stance until it actually starts its balance sheet reduction and the markets can gauge its effects," said Kota Hirayama, senior economist at SMBC Nikko Securities in Tokyo. "Fundamentals continue to support emerging markets including those in Asia, although the Fed's latest stance did add a layer of uncertainty going forward."
In currencies, the Australian dollar was down 0.1 per cent at US$0.7926 after sliding 1.2 per cent the previous day when Reserve Bank of Australia Governor Philip Lowe said the central bank does not have to follow a general move globally to raise interest rates.
A sharp drop in the price of iron ore, Australia's main export commodity, to a two-month low, has also weighed on the currency.
The euro inched up 0.1 per cent to US$1.1954 and on track to end the week 0.8 per cent lower.
The dollar index against a basket of six major currencies was down 0.2 per cent at 92.052.
Crude oil prices were little changed amid a wait-and-see mood as ministers from the Organization of the Petroleum Exporting Countries, Russia and other producers meet later on Friday to discuss a possible extension of supply cuts.
Brent crude was down 0.1 per cent at US$56.39 a barrel after reaching a five-month high of US$56.53 overnight.