Turn to safe havens

The aftermath of North Korea firing a missile over Japan found investors turning to safe-haven assets as Asian markets fell.

Background

North Korea has increasingly ignored the calls from the international community to shut down its nuclear program. In July 2017, it tested two intercontinental ballistic missiles (ICBM). It has also launched other short-range ballistic missiles to the sea. In August 2017, North Korea fired a Hwasong-12 rocket that flew over northern Japan. Reaching an altitude of about 550km, the missile reportedly flew a distance of more than 2,700km. The UN reacted by unanimously condemning the actions and Japanese Prime Minister Shinzo Abe deemed it a threat to Japan.

The markets took notice of the increased tensions not only in the region but also between North Korea and America. Hence, global equity prices slipped in the face of political instability and conflict in the region. 

A safe haven is generally described as an investment that markets expect to retain its value even during turbulence. Safe haven assets are known to actually increase in prices during periods of increased volatility. Investors turn to safe-haven assets in order to limit their own exposure to losses that might be incurred during such periods. Investors generally consider gold to be safe haven when currency markets are affected. United States Treasury Bills are also considered a safe haven. The Swiss Franc is considered a safe haven currency in the forex market.

Analysis

Immediately after the incident, Japan's Nikkei 225 dropped 0.81 percent. It was able to recoup some of its initial losses to close down 0.45 percent. Stock markets in Asia tend to drop sharply every time there is a provocation from North Korea. However, even though, there was a downturn in the markets, it wasn’t as bad as the previous times.

Additionally, South Korea's Kospi index dropped as much as 1.44 percent in early trade.

As might have been expected, prices for spot gold rose. It reached the highest in almost 10 months due to safe-haven demands. Japanese currency Yen, which is also considered a safe-haven traded as high as 108.32 Yen to the Dollar. This was its strongest performance in the past four months.  Bitcoin has also seemingly become a safe haven. The price of Bitcoin was trading at its highest level ever. At one point, the average price of Bitcoin across global exchanges touched $4,703.21.

However, markets are wary that this could lead to a global risk-off. ING Asia Head of Research Rob Carnell said in a note, “North Korea's firing of more missiles, this time over Japan, could be the trigger for another round of global risk off.”

Assessment

Our assessment is that markets will continue to react to North Korea’s increased military engagement.