Market calm cracks amid rising tensions with N. Korea

The market calm on Wall Street and around the globe has been broken by escalating tensions between the United States and North Korea.

U.S. stocks closed lower Wednesday for a second consecutive day as traders reacted to the latest bout of saber-rattling between the two countries.

Investors appeared to be pulling back on risk taking amid the latest geopolitical threat to make its way on their investment radars. Stock prices retreated and money flowed into so-called safe havens such as gold, which jumped nearly $17 per ounce, or 1.3%, and 10-year U.S. government bonds, where yields briefly dipped as low as 2.21%, the lowest level since late June.

“As things stand now, risk is definitely off the menu,” said Fawad Razaqzada, an analyst at Forex.com.

To be sure, market reaction on Wall Street has been muted so far.

The Dow Jones industrial average — which dipped late Tuesday, snapping a streak of nine record closes, after President Trump warned North Korea that the U.S. would respond to its threats with “fire and fury” — closed Wednesday down nearly

37 points, or 0.2%, to 22,048.70. But about three-quarters of the loss, or 28 points, was due to a

4.2% drop in Dow component Walt Disney, which reported dis-

“The reality is geopolitical events are nearly impossible to forecast and even more difficult to trade.” Chris Verrone of Strategas Research Partners

appointing earnings after Tuesday’s close.

Geopolitical threats, of course, are not new to markets, but they are hard for investors to handi- cap, Chris Verrone of Strategas Research Partners, a Wall Street firm, said in a research note.

“The reality is geopolitical events are nearly impossible to forecast and even more difficult to trade,” he wrote.

North Korea has been a market risk all summer, following the test launch of two missiles in July, and recent reports of its bolstered nuclear capabilities. Still, according to Strategas, political and geopolitical events “are not

automatically big market movers after the knee-jerk response.”

South Korea’s main stock index, the Kospi, fell just 1.1% Wednesday. The Kospi was up 21% for the year at its July 24 peak but has given back 3.4% since then.

Still, Wall Street pros are closely watching how the latest tensions play out.

Here’s how Wall Street is evaluating the risks to their portfolios:

uWar of words different

than actual war. While the war of words between Trump and North Korea has “ratcheted up the uncertainty,” it is much different than actual military confrontation, says Brad McMillan, chief investment officer for Commonwealth Financial Network.

“Rhetoric between the U.S. and North Korea is nothing new, so absent actual (military) action, the market effect should be short-lived,” he says.

uImpact on trade. If fighting were to break out, any interruptions to normal trade flows could pose a risk to markets, says Chris Zaccarelli, chief investment officer at Cornerstone Financial Partners.

South Korea is home to many Fortune Global 500 companies, including electronics giant and mobile phone maker Samsung, automakers Hyundai and Kia and TV manufacturer LG.

“Korea is a major supplier of electronic components and autos,” says Matthew Peterson, chief wealth strategist for LPL Financial. “So open warfare on the Korean peninsula could disrupt this trade, which would be negative for the stock market.”

uDiplomatic solution. Reducing the tensions with diplomacy rather than through military means is the best outcome for markets, Zaccarelli says: “I would hope the saber-rattling is just talk and that it may be a catalyst for China and other nations — possibly even Russia — to intervene in a way that provides a diplomatic solution to the problem of North Korea’s nuclear ambitions.”