Investors moved into haven assets and sold stocks following North Korea's largest-ever nuclear test, prompting U.S. President Donald Trump to denounce the country as a hostile rogue nation.
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Just before European markets opened, South Korea's Defense Ministry reported that North Korea was again preparing for a possible missile launch.
Still, analysts said the moves were relatively muted and pointed to past market reactions to North Korean missile and nuclear tests, which have quickly been reversed.
The Stoxx Europe 600 index was down around 0.4% at midday in London, after falling by as much as 0.7% earlier in the session. Japan's Nikkei 225 closed 0.93% lower.
U.S. equity futures were hit too, with the S&P 500 down 0.3% and Dow Jones Industrial Average 0.2% lower. Most U.S. financial markets are closed Monday for Labor Day.
"In general, investors have been rewarded for ignoring recent political risks and taking a long-term view, that's what we recommend to our clients," said Tilmann Galler, global market strategist at J.P. Morgan Asset Management.
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"Overall you need to recognize and take into account the overall fundamentals for the market, the economic and earnings growth we've seen in recent quarters," he added.
North Korea's acceleration of both its nuclear and missile programs has presented Mr. Trump with his biggest foreign-policy crisis. In the wake of the latest escalation, the U.S. said it was drawing up new economic sanctions.
The Japanese yen came off its initial lows and fluctuations in Asian markets were more pronounced last Tuesday, when North Korea fired a missile over a main Japanese island for the first time since 2009.
As morning trading ended in Europe, the dollar was down 0.5% against the yen, with the dollar-yen pair at Yen109.6. The Swiss franc, another haven currency, was up 0.7% against the dollar.
In other haven assets, New York spot gold prices were up 0.7% to $1,340.1, after rising by slightly over 1% to touch 11-month highs earlier in the session.
Investors and analysts have struggled in recent weeks to weigh up how much of a market reaction the escalating tensions between the U.S. and North Korea should warrant, and have generally advocated caution against selling.
Analysts at Citigroup suggested the reaction to the provocations may not last. "Such market moves tend to be short-lived, as typically tensions defuse quickly," the analysts wrote in a research note Sunday.
"Unless the global response to this test raises the probability of a military strike," they added, "this time may play out similarly."
On Monday, South Korea's Kospi fell as much as 1.7%, though it quickly pared declines and ended down 1.2%, while the South Korean won slid 0.7% against the U.S. dollar. Elsewhere, Hong Kong's Hang Seng Index fell 0.8% and Australia's S&P/ASX 200 closed down 0.4%.
Even following recent tensions, volatility in U.S. and global markets has been exceptionally muted, offering a major support to international markets. Late last month the CBOE Volatility Index or VIX, which measures S&P 500 options prices to assess expected volatility, hit an all-time intraday low.
After recent missile tests, the VIX closed at around 10.13 on Friday, far below its average of around 20 over the last two decades.
"The more of a nuclear threat North Korea poses, the less likely the bellicose rhetoric it provokes is likely to translate into action," said Richard McGuire, head of rates strategy at Rabobank. "As a result, there is a natural tension between the aggressiveness of any threatened response and its credibility."
U.S. bond markets were closed Monday. Yields on 10-year German bunds dipped slightly, falling from 0.38% at Friday's close to 0.37% in midday European trading.
But despite the extremely low volatility in markets, some analysts said they expect the threat from North Korea's government to continue to add an element of uncertainty.
"The U.S. seems unable to do anything to North Korea," said Castor Pang, head of research at Core Pacific-Yamaichi International. "So, the overall market is going to fluctuate in the near term as no one knows what's going to happen," he said.
Suryatapa Bhattacharya contributed to this article.
Write to Mike Bird at Mike.Bird@wsj.com and Ese Erheriene at firstname.lastname@example.org
(END) Dow Jones Newswires
September 04, 2017 07:30 ET (11:30 GMT)