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.
Just before European markets opened, South Korea's Defense Ministry reported that North Korea was again preparing for a possible missile launch.
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The Stoxx Europe 600 index was down around 0.6%, in early European trading, following Asian stocks broadly lower. Japan's Nikkei 225 closed 0.93% lower.
U.S. equity futures were hit too, with the S&P 500 down 0.5% and Dow Jones Industrial Average 0.3% lower. Most U.S. financial markets are closed Monday for Labor Day.
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.
Still, the market reaction on Monday was measured. 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.
In early European trading, the dollar was down 0.7% against the yen, with the dollar-yen pair at Yen109.4. The Swiss franc, another haven currency, was up 0.7% against the dollar.
In other haven assets, New York spot gold prices were up 1% to $1,343 a troy ounce, touching 11-month highs.
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.
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 0.8% against the U.S. dollar. Elsewhere, Hong Kong's Hang Seng Index fell 0.7% and Australia's S&P/ASX 200 was also down 0.4%.
"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 0.36% in early European trading.
"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 05:08 ET (09:08 GMT)