Investors seek safety as North Korea tension escalates; global stocks end off lows

The Wall St sign is picture in front of the New York Stock Exchange (NYSE) in New York City, New York, U.S., August 2, 2017. REUTERS/Carlo Allegri · Reuters

By Rodrigo Campos

NEW YORK (Reuters) - U.S. President Donald Trump's warning to North Korea and Pyongyang's threat of possible armed retaliation drove investors away from stocks and other risky assets on Wednesday and into textbook safe-havens like gold and Treasuries.

But despite the largest percentage drop in over a month on a global equities index, U.S. equities ended only slightly lower as healthy corporate earnings and a recent string of strong economic data enticed investors into beaten-down stocks.

Trump's remarks on Tuesday afternoon that North Korea would face "fire and fury like the world has never seen" weighed on Wall Street and drove up the VIX "fear gauge" (.VIX), or the cost of protection against a drop in the S&P 500.

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. Even so, the close was the highest in a month.

Following Trump's remarks, North Korea on Wednesday said it was "carefully examining" plans for a missile attack on the U.S. Pacific territory of Guam, which is home to a large U.S. military base. U.S. Defense Secretary Jim Mattis told Pyongyang it should stop any actions that would lead to the "end of its regime and the destruction of its people."

But while most traders appeared to favor safe-haven assets, bargain seekers helped Wall Street's three major indexes pare the day's earlier losses.

"It's amazing when you consider the headlines just how calm the equity markets are, how they've taken things in their stride," said Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina.

"The strong global economy driven by strong earnings is really helping to minimize some of these concerns. The global economy is really on some firm footing," he said.

The Dow Jones Industrial Average (.DJI) fell 36.64 points, or 0.17 percent, to 22,048.7, the S&P 500 (.SPX) lost 0.9 points, or 0.04 percent, to 2,474.02 and the Nasdaq Composite (.IXIC) dropped 18.13 points, or 0.28 percent, to 6,352.33.

The S&P fell as much as 0.52 percent at its session low.

The pan-European FTSEurofirst 300 index (.FTEU3) lost 0.75 percent and MSCI's gauge of stocks across the globe shed 0.33 percent.

Emerging market stocks lost 0.89 percent. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.57 percent lower, while Japan's Nikkei (.N225) percent.

FRANC RALLY

Traditional safe-haven currencies including the Swiss franc and Japanese yen rose against the U.S. dollar.

"Obviously we are looking at the increased tensions between the U.S. and North Korea," said Brad Bechtel, managing director FX at Jefferies in New York. "Tensions are still high and not going away at the moment. Safe-havens are bid and markets are a little uneasy."