Asian stocks suffer rout as Wall St 'fear gauge' spikes

Investors bail out on fears US-N. Korea tensions could turn into military conflict

Markets across Asia suffered significant falls yesterday, as investors bailed out of equities on fears that escalating tensions between the United States and North Korea could boil over into military confrontation.

Global markets have lost nearly US$1 trillion (S$1.36 trillion), while gold surged to a nine-week high, since US President Donald Trump said on Tuesday that North Korea "will be met with fire and fury like the world has never seen" and then dialled up his warning further on Thursday by saying he had not been tough enough in those comments.

The war of words came after North Korea's state media reported its military leaders were working on a proposal to launch four intermediate-range missiles into the sea off the small US territory of Guam.

Hong Kong led the sell-off, slumping 2.04 per cent, while Shanghai slipped 1.63 per cent. Seoul shed 1.69 per cent, Jakarta fell 1.03 per cent, and The Straits Times Index lost 1.31 per cent. Not helping sentiment was news that Chinese Internet giants Tencent, Baidu and Sina Weibo are under investigation for cyber-security violations.

The CBOE Volatility Index, or Wall Street "fear gauge", spiked to its highest mark since Mr Trump's election on Nov 8 last year. Gold, usually a safe haven at times of great uncertainty, has jumped 1.6 per cent since Wednesday.

On Wall Street, US stocks yesterday opened on a positive note, rising for the first time in four days, while investors digested the latest July inflation data released last night (Singapore time) for clues on Federal Reserve policies.

CIMB economist Song Seng Wun said: "Markets do not like uncertainty. What transpires this weekend will be important to how markets trade next week. If the exchange of words continues to be ratcheted up by either Trump or North Korea, then the market will likely continue to be sold down."

TRUMP'S SHARP RESPONSE

While we are used to hearing from Pyongyang what they intend to do, what makes it different this time is (Trump's) very sharp response... which is making everyone a lot more nervous.

CIMB ECONOMIST SONG SENG WUN

Tension between the two countries usually heightens around this time of the year as the US conducts a series of military exercises jointly with South Korea, which the North views as direct intimidation - but nothing as bellicose as this.

"While we're used to hearing from Pyongyang what they intend to do, what makes it different this time is (Trump's) very sharp response... which is making everyone a lot more nervous," Mr Song said.

Bank of Singapore investment strategist James Cheo noted that North Korea's provocations tend to have a limited impact on markets.

"There might be some volatility initially but markets usually recovered afterwards, especially as North Korea's nuclear threats remained only provocations. The only time geopolitics had a more profound impact was when (it) triggered ... an oil shock," he said.

Mr Song noted: "The perception is that war is a low probability, but it's still a high-risk event. So far, however, there is no panic selling. Circuit breakers in stock markets aren't being triggered yet."

A version of this article appeared in the print edition of The Straits Times on August 12, 2017, with the headline 'Asian stocks suffer rout as Wall St 'fear gauge' spikes'. Print Edition | Subscribe