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North Korea rhetoric heats up, lifting bond prices, yen

US stocks down slightly in morning trading.

Jitters over a fresh exchange of barbs between North Korea and the United States drove up US Treasury prices and the yen on Friday while they damped sentiment in the US stock market.

MSCI’s world equity index, which tracks shares in 46 countries, was little changed, and Britain’s main FTSE 100 stock index climbed as Prime Minister Theresa May laid out plans for Britain’s exit from the European Union.

North Korea said it might test a hydrogen bomb over the Pacific Ocean, in response to US President Donald Trump’s recent threat to destroy the reclusive country in a United Nations address.

“Big noise out of North Korea will keep today’s trading defensive,” said Peter Cardillo, chief market economist at First Standard Financial in New York. “While we don’t expect a serious selloff, the geopolitical rhetoric could heat up.”

The aversion to risk drove investors into assets considered safer during times of geopolitical turmoil, like the Japanese yen and Treasuries.

The US dollar had scaled a two-month peak of 112.71 against the yen on Thursday, boosted by the US Federal Reserve signaling this week that it was still on track to raise interest rates by the end of the year, and after the Bank of Japan maintained its bond-buying pledge.

Sterling slipped after May’s speech, but then recovered.

May called for Britain to stay in the European Union’s single market during a roughly two-year transition out of the EU.

Yen gains

The Japanese yen strengthened 0.42% versus the greenback at 112.02 per dollar, while sterling was last trading at $1.3514, down 0.47% on the day. “(The yen) had been significantly under pressure and it’s not totally surprising to see a little bit of a rebound in the yen ahead of the weekend,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

US Treasury prices gained on concerns about conflict with North Korea. Benchmark 10-year notes last rose 6/32 in price to yield 2.2587%, from 2.278% late on Thursday.

The US Treasury yield curve flattened to its lowest levels since late 2007 overnight, before retracing in the US session.

The Dow Jones Industrial Average fell 25.74 points, or 0.12%, to 22 333.49, the S&P 500 lost 1.32 points, or 0.05%, to 2 499.28 and the Nasdaq Composite dropped 5.38 points, or 0.08%, to 6,417.31.

MSCI’s gauge of stocks across the globe gained just 0.05%.

Britain’s FTSE 100 was up 0.6%, while the pan-European FTSEurofirst 300 index rose 0.05%.

Helping to support the gains, euro zone businesses ended the third quarter with much stronger growth than predicted, adding to evidence of the region’s newfound dynamism which has spurred strong inflows into European equities this year.

Oil prices were steady as investors waited to see whether major producers meeting in Vienna would back an extension to output cuts beyond March next year.

US crude rose 0.16% to $50.63 per barrel and Brent was last at $56.31, up 0.39% on the day.

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