Nikkei flat as North Korea fears recede; financial stocks tumble

Traders work on the floor of the NYSE in New York

Traders work on the floor of the NYSE in New York

Stocks are lower at midday as investors weighed the growing tensions between the US and North Korea.

Analysts pointed to the harsh threats and sabre rattling from US President Donald Trump, including a message Wednesday on Twitter boasting the United States' nuclear arsenal was now "more powerful than ever before".

The US president's comments came after reports that North Korea has produced a nuclear warhead small enough to fit inside its missiles.

The utilities index, often seen as a bond proxy because of its companies' slow reliable growth and high dividends, was the only S&P sector that ended the day up, showing a 0.25 percent gain.

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South Korea's KOSPI fell 1.7 per cent on Friday to its lowest since May 24, but its losses for the week were a relatively modest 3.2 per cent. The last time the S&P closed down more than 1 percent was May 17 when it fell 1.8 percent.

Gold prices have maintained a firm tone with a push to 2-month highs on Thursday as underlying demand for defensive assets remained an important feature.

Many world stock markets have hit record or multi-year highs in recent weeks, leaving them vulnerable to a sell-off, and the tensions have proved the trigger. When the rhetoric between the two leaders heated up, investors were scurrying for safe haven currencies, including the Yen and the Swiss Franc, which surged about 1.1% on Wednesday. Hong Kong's Hang Seng Index dropped 1.69%, while mainland markets saw the Shanghai Composite dip 1.04%.

So far it's just been a war of words between the US and North Korea so the rally has just been a normal reaction to the possibility of a geopolitical event. Against the euro, the dollar is valued at USD1.826 compared to yesterday's USD1.1772.

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The VIX closed 1.4 percent higher but at the lowest level of the day at 11.11, after rising as high as 12.63. The S&P 500 closed 0.04% lower while the Nasdaq Composite closed at 6352.33, down 0.28%.

The dollar was further weighed on Friday by the soft US inflation data.

Banks also fell 2 percent, putting the index on track for its worst week in nine months.

"Heightened geopolitical risks overnight have seen the markets flip from risk-on to risk-off and we have to wait and see how long this move runs before adding some positions", said Viraj Patel, an FX strategist at ING in London.

And in a textbook-type cross-asset move toward safety in times of trouble, the Japanese yen hit an eight-week high against the USA dollar while spot gold also reached a two-month high.

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Investors opted for the perceived safety of US Treasuries, which pushed the yield on the 10-year note three basis points lower to 2.21 per cent. It is now on track for its biggest weekly drop since the week before the November 8 USA presidential election.

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