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From the Floor: North Korean test blast drives safe-haven demand

  • • North Korea's nuclear test blast escalates tensions
  • • Asian stocks drop as geopolitical fears spark flight to safety
  • • Safe-haven assets, including gold, JPY and government bonds, in demand
  • • KRW drops against USD and JPY
  • • Gold and silver boosted by N.Korean tensions
  • • Gold finding 'very firm' support at $1,300/oz
  • • Gasoline prices retreat as some Gulf Coast refineries prepare to reopen
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By John Acher

North Korea's major nuclear test blast at the weekend rattled Asia-Pacific stock markets on Monday and sent investors scurrying into perceived safe-haven assets, including gold, the Japanese yen, and government bonds.

North Korea said it had tested an advanced hydrogen bomb for a long-range missile on Sunday, causing a man-made earthquake near the test.

"We go to the next level of threats from North Korea," says Tareck Horchani at Saxo Bank's Singapore hub.

The heightened tensions could lead to new sanctions on North Korea, including cutting the oil supply, though China has yet to respond, Horchani says.

The Korean won dropped sharply against the US dollar and the yen. "This is the first time that we really see USDKRW reacting to the threats from North Korea," Horchani says.

JPYKRW. The Korean won dropped steeply against the USD and JPY
Source: Saxo Bank

"This is embarrassing to China, but is also driving a wedge between South Korea and the US," says Saxo Bank's FX strategy chief John J Hardy.  US president Donald Trump reacted by blaming South Korea for what he called a policy of “appeasement”.

"In forexland, this generally means yen higher," Hardy says.

Precious metals rose in the flight to safety.

"The reaction to the weekend’s event in North Korea at the weekend can be seen in gold and silver," says Saxo Bank's commodities strategy chief Ole Hansen.

"For now there is no doubt that support at $1,300/oz remains very firm," Hansen says of the gold price, adding that the next target higher looks to be $1,375/oz.

Gold taking aim at the 2016 high at $1,375/oz
Gold priceSource: Saxo Bank

"The underlying sentiment is to stay long in precious metals for now,” says Hansen.

Meanwhile, gasoline prices, which had soared on the disruption to US refining caused by tropical storm Harvey, have retreated as refineries, ports and pipelines along the Texas Gulf coast prepare to reopen, Hansen says.

"It will, however, take weeks before we return to norm," Hansen says, adding that a large amount of crude and oil products are now simply in the wrong places.

Core bonds also strengthened on the back of the heightened North Korea worries.

"In bond markets, we definitely see the tension from North Korea," says Saxo Bank's head of fixed-income strategy Simon Fasdal. "Government bonds are the preferred safe haven in times like these."

US financial markets are closed today for the Labor Day holiday.

John Acher is a consulting editor at TradingFloor
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