Wall Street fell on Tuesday as traders reacted to the war of words between Donald Trump and Kim Jong Un © AFP
The US stock market on Thursday suffered its steepest decline in three months and Wall Street’s “fear gauge” jumped to its highest level since the US election, after President Donald Trump warned that North Korea should be “very, very nervous”.
Financial markets have been deep in the summer doldrums, pushing volatility measures down to fresh multiyear lows, but the escalating sabre-rattling between North Korea and the US has triggered jitters.
The S&P 500 index slid 1.5 per cent — its biggest one-day drop since the last flash of turbulence on May 17 — with the weakness exacerbated by a bellicose press conference by Mr Trump. Earlier this week the president threatened North Korea with “fire and fury” and on Thursday at his Bedminster, New Jersey golf club he said that his warning had not been tough enough.
“I will tell you this, if North Korea does anything in terms of even thinking about attack — of anybody that we love or we represent, or our allies or us, they can be very, very nervous,” he said. “. . . because things will happen to them like they never thought possible.”
The hawkish comments deepened Wall Street’s nervousness, and helped lift the Vix index — a gauge of expected volatility that doubles as a measure of investor fear — to 16 per cent, its highest level since the November election. The 10-year Treasury yield dipped another 4 basis points to a two-month low of 2.2 per cent as fund managers sought out the safety of US government debt.
“It is not a perfect storm just yet but a lot of things are building in that direction and the market is getting ready for a healthy correction,” said Andrew Brenner, head of international fixed income at National Alliance.
“You have the North Korean situation [and] you are heading into the weekend . . . People are fearful of equity markets, so you could have another down move. Once you get this momentum moving, it could feed on itself.”
Mr Brenner added that investors, who had previously trained their attention on inflation data due at the end of the week, were now focused on how stocks open on Friday morning.
“It is a reaction to sabre-rattling,” said JJ Kinahan, chief market strategist at TD Ameritrade. One thing that “caught his eye” in terms of the North Korea flare-up leading to more selling was the drop in the Nasdaq Composite below its 50-day moving average, a popular technical signal.
Technology stocks led the sell-off, with the S&P 500 information technology index sliding 2.2 per cent. All major sectors fell except utilities, traditionally a safer, steadier industry at times of turbulence. Even defence stocks dipped.
The parallel rally in the bond market also does not bode well for shares of financial companies, which fell 1.8 per cent on Thursday.
“If bonds continue higher, taking rates lower, that will continue to put pressure on financials [stocks],” Mr Kinahan said. “If you start to see the financial sector get aggressively sold that could be a tipping point to a more pronounced sell-off.”
Two heavily traded junk-bond exchange traded funds slid, with the iShares iBoxx high-yield corporate bond ETF and SPDR Bloomberg Barclays high-yield bond ETF — known by the respective tickers HYG and JNK — settling at four-month lows.