North Korea’s sixth nuclear test and other geopolitical factors, such as Hurricane Harvey, have positively impacted safe haven investments as investors turn to low-risk investments. Safe haven investments include gold which reached a nine and a half month high, rising by over 1% in just one day, and yesterday the Japanese yen was up 7.6% for 2017. Conversely, equity markets were hit by tension as European and Asian stocks declined in early September with FTSE 100 down by 0.36% and the Nikkei nearly losing 1%. Indeed, the tensions are creating an investment environment which is unstable due to uncertainty about whether the conflict will be resolved or escalated.
Possible Shift in Safe-Haven Investments?
Gold is regarded as a safe-haven investment due to its ability to be unaffected by government policy changes, such as interest rates, as gold retains its inherent value in times of market insecurity. Furthermore, gold is an asset which has a low correlation with movements in other stocks prices, as shown below by figures close to 0. This means that gold can be used to hedge against unexpected market movements and also inflation.
As pessimism rises, so too does demand for gold, increasing its price. This occurred following the announcement of North Korea’s sixth nuclear test, as detailed earlier.
The Japanese yen also appreciated. This is interesting, given the fact that Japan is seen by many to be a target by North Korean nuclear bombs. However, while tensions between the countries continue without any direct action, many believe the yen will maintain its strong position in foreign exchange markets. If there was to be a nuclear attack, the impact is unclear as some- including the head of Japan’s markets research at JP Morgan- believe that “the more damage to Japan, the greater appreciation of the yen”, while the chief market economist at Nomura deems there will be a significant depreciation of the yen due to an outflow of funds by investors. Some also believe that an attack on Japan could lead to a worldwide financial crisis.
Could investors turn away from the Japanese yen if Japan was attacked, and look to other safe-haven assets such as government bonds or other currencies? For example, yields of the German government bond, Bund, reached four-month lows due to significant price rises, while the Swiss franc rose nearly 1% against the US dollar. The ambiguity surrounding the impact of North Korea’s next actions regarding Japan could present an opportunity for speculators to search for investments elsewhere.
Other geopolitical factors such as Hurricane Harvey have caused Brent crude prices to soar to a three month high, due to continuous refinery outages on the US Gulf Coast leading to a reduced output of 2.3 million barrels per day. With another major hurricane impending, there could be even further oil price increases. However, the hurricane will not destabilise the oil price in the long-term.
To conclude, geopolitical factors are the predominant factors causing movements in stocks, bonds, commodities and foreign exchange but as long as the tensions with North Korea are not escalated any further, it is probable that global asset prices will be stable.