Miniaturised nuclear warheads, threats to attack Guam and warnings about America’s own ‘fire and fury’: it’s all like something out of a spy thriller. Only this is real life and the chilling effect has rocked sentiment in global equity markets.

European equity markets fell sharply in early trading as the risk-off mood stoked by Korean tensions prevailed. Taking the cue from the US and Asia overnight, the main bourses in Europe were all around 1% lower this morning.

That said other riskier assets have found bid again fairly quickly and stocks may therefore recover pretty sharpish if this proves no more than a temporary war of words. Indeed overall the risk-off moves are not enormous for the time being, but we await developments.

On Tuesday the Dow snapped its record run but the selling was pretty modest, while moves in the Vix have not been massive. The Vix has spiked 10% but only to a level last seen a month ago, while the Dow gave up a paltry 33 points. Moves in Asia were a bit more dramatic for good reason. Gold rose but is only trading at its highest since Friday – it doesn’t look like much risk is being taken away yet.

During the Cuban missile crisis the S&P 500 was pretty steady throughout October so the stock market is not always a great guide to impending nuclear war. But the index had already cratered by about 28% in the six months leading up to the crisis. Conditions today are a little different with a near-decade long bull market leaving valuations extremely high. A spark from the Korean peninsula could set off a correction, particularly given the time of year.

The dollar bounced off two-month lows against the yen and seems to be stabilising around the 110 handle for now. The dollar has also rallied against the Swiss franc this morning. If this were a real crisis we might expect the yen to advance further so it does look like FX markets are pretty sanguine.

Cable is finding bid again to move back to $1.30 having slumped yesterday on a blockbuster JOLTs jobs openings report that sent the greenback higher. The moves in the dollar on that report were a sign that summer is here and a lot of people are on holiday.

After four straight sessions where the pound has closed below the previous day’s lows, cable was maybe due a bit of a bump but with Brexit in the mix any recovery is likely to be short-lived. 

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