Flows to Safe Havens Increase After NK Missile

Geopolitical tensions were once again dictating trading. Risk aversion looks set to be the dominant theme as risk appetite slides following a defiant ballistic missile launch by North Korea.

Tensions over North Korea have been running high for several weeks. August is a notoriously difficult month for relations with the rogue state given that the US and South Korea participate in joint military exercises involving 17,500 troops, which clearly aggravates North Korea. The latest move undermines steps taken by the US to bring North Korea to the negotiating table and is the most aggressive step from Pyongyang in 20 years.

Following news of the launch trader’s nerves were shredded and a clear risk off strategy was adopted, sending riskier assets such as equities, southwards whilst safe havens shine through. Following the initial knee-jerk reaction we have since Asian equity markets pick themselves off session lows, however European bourses across the board have opened up heavily lower.

Gold hits nine-month high

Assets that are perceived as safe havens have received a boost following the launch. Gold, which has been range bound between $1200 and $1300 for most of this year, surged to a nine month high before easing back to $1320. The clear break above the $1300 resistance means that further gains could be in store for the precious metal in the near term.

In the currency markets, the anti-risk Japanese yen traded broadly higher whilst the sentiment linked Australian dollar and New Zealand dollar tumbled in Asian trade. Traders moods had been dark following Hurricane Harvey, the news from North Korea has only darkened sentiment further.

Demand for the dollar dampens

Meanwhile the dollar has continued its decline, dropping sharply to a 16-month low versus a basket of currencies, which has offered further support to dollar denominated commodities such as gold. Whilst the US dollar is often seen as a safe haven currency given its global reserve status, this time investors are turning their back on the buck.

Following Janet Yellen’s appearance at Jackson Hole hopes of a third interest rate rise before the end of the year are sitting at under 40% which is weighing on the buck. It will take some big news from President Trump tomorrow to get dollar investors excited once more. US President Trump is expected to take to the stage to deliver news on the bringing in his new tax reform. This could be the good news that the dollar is looking for to push it back above the psychological level of 92. However, doubts remain strong as to whether, Trump, who failed to implement the healthcare bill, is capable to implementing his pro-growth agenda.

There is little in the way of high impacting economic data due today, so trading is expected to continue to be sentiment driven. Any new headlines or hot-headed rhetoric from US President Trump could serve to aggravate the tense geopolitical situation further. Should this be the case then expect to see safe havens continue to push higher whilst equity markets could pull lower once more.