Equity markets in Asia dropped after European stocks SXXP, -1.04% declined Thursday and a fall in U.S. stocks DJIA, +0.07% SPX, +0.13% accelerated after U.S. President Donald Trump said his threat on Tuesday to unleash “fire and fury” on North Korea “maybe wasn’t tough enough.” U.S. indexes ultimately logged their biggest declines since May 17.
Read: Wall Street’s ‘fear gauge’ nears 9-month high after Trump’s ‘fire and fury’ remarks
China raised the stakes with an editorial in the state-run Global Times late Thursday saying Beijing would intervene if there is a first strike against North Korea.
“This situation is beginning to develop into this generation’s Cuban missile crisis,” wrote ING’s Robert Carnell in a morning note to clients.
Before their decline in recent days, Asian markets had logged some of the world’s biggest gains this year. For some investors, the rising tensions between the U.S. and North Korea—and the typical late-summer slowdown in trading—are an opportunity to pull back and await developments.
Market conditions were right for profit-taking” in stocks this week, said Alexander Ho Wan Lee, chief investment officer at Nimbus Capital Group.
Stock benchmarks in South Korea, Hong Kong and Shanghai each fell at least 1.6% Friday, with Australia not far behind. Japanese markets were closed for a holiday.
Korea’s Kospi SEU, -1.69% which came into Friday on its first three-session losing streak since April, finished with a loss of 1.7% at 2,319.71, its lowest level since late May.
But the benchmark is still up 14.5% for the year, which speaks to how strong Korean stocks, and many Asian markets, have been. Index giant Samsung Electronics 005930, -2.79% was a major factor in the reversal, down 2.8% on Friday, and 6.5% for the week—its worst week since October.
Even hotter in 2017 have been Hong Kong stocks. When trading ended Tuesday, the Hang Seng Index HSI, -2.04% had risen in 19 of the past 22 sessions and was up more than 25% for the year. But it fell Wednesday and Thursday, marking the first consecutive down days in a month. The benchmark sank 2% on Friday, the biggest one-day drop since November.
Chinese messaging and social-gaming company Tencent 0700, -4.90% , whose surge of about 70% this year was key to the Hang Seng’s gains, was off 4.9% Friday.
Read: Chinese probe targets Weibo, WeChat, Baidu site over threat to public security
Given the lack of sustained stock selling this year in much of the world — let alone large declines —concern that a market correction is at hand isn’t a surprise, analysts say. Many pullbacks have quickly reversed before they reached the 10% mark that commonly denotes a correction.
But the current geopolitical situation could keep potential buyers on the sidelines for now, said Lee at Nimbus Capital — in fact, he added, it is already keeping some out of Asian markets, despite robust recent quarterly results from companies in the region.
In China, selling deepened as Friday morning progressed. Beijing warned of irrational trading in metals after steel-rebar and aluminum futures in China hit five-year highs this week.
And when Japanese traders get back to their desks on Monday, stocks will need to catch up with not just Friday’s regional weakness but fresh yen gains. The currency strengthened steadily during Thursday’s European trading and gained further in Asia. The dollar USDJPY, -0.01% fell below ¥109 for the first time since June.
The Stoxx Europe 600 SXXP, -1.04% closed down 1% to 372.14, the weakest finish since Feb. 28. No sector finished higher.
For the week, the index fell 2.7%, the worst week since early November 2016, just before the U.S. presidential election was held.
“The weekend brings an undefined amount of risk for investors, with the potential for circumstances to escalate both dramatically and unexpectedly at a time when markets are closed,” wrote Oanda’s senior market analyst Craig Erlam.
“In the unlikely event that either side follows through on the threats of recent days and an attack occurs, we could see some dramatic moves at the open next week, something investors in perceived riskier assets would be very vulnerable to,” he added.
Read: Dalio urges investors to buy gold to hedge against possible war with North Korea
European equities extended losses Friday after U.S. President Donald Trump on Thursday warned that his threat on Tuesday to unleash “fire and fury” on North Korea “maybe wasn’t tough enough.” Trump’s comments came as North Korean leader Kim Jong Un made an explicit threat to strike a U.S. military base in Guam.
China weighed in on the standoff late Thursday, saying in an editorial in state-run Global Times that Beijing will intervene if the U.S. strikes first against North Korea.
Read: Opinion: What to do with stocks if the U.S. and North Korea go to war
Oil stocks felt the additional weight of lower oil prices CLU7, +0.41% LCOV7, +0.29% . Shares of oil producer Tullow Oil PLC TLW, -6.25% sank 6.3% and offshore energy services contractor SBM Offshore NV SBMO, -5.46% fell 5.5%.
The International Energy Agency said in its monthly report that global oil production rose in July, but it also upwardly revised its 2017 forecast for demand growth.
In other developments, Novozymes A/S shares NZYMB, +1.16% flipped higher to close up 1.2%. The shares had dropped during the session after the Danish biotech firm cut its growth outlook.
National indexes: France’s CAC 40 index PX1, -1.06% fell 1.1% to 5,060.92, and in London, the FTSE 100 UKX, -1.08% flopped down 1.1% to 7,309.96. Spain’s IBEX 35 IBEX, -1.60% gave up 1.6% to close at 10,282.90.
But Germany’s DAX 30 DAX, +0.00% ended down less than 1 point at 12,014.06. The index during the session fell below 12,000 as well as its 200-day moving average.
The euro EURUSD, +0.4162% bought $1.1822, up from $1.774 late Thursday in New York.
Read: These are the stocks to buy—and avoid—as the euro rallies
U.S. stocks closed higher on Friday as Wall Street clawed back from a sharp decline in the previous session but the market still posted a weekly loss on lingering geopolitical uncertainties.
The Dow Jones Industrial Average DJIA, +0.07% rose 14.31 points to close at 21,858.32. The S&P 500 SPX, +0.13% gained 3.11 points, or 0.1%, to end at 2,441.32, supported by gains in consumer-discretionary, technology and health-care sectors.
The Nasdaq Composite Index COMP, +0.64% climbed 39.68 points, or 0.6%, to close at 6,256.56.
“From a geopolitical perspective, we understand why the escalation in tensions will have shaken some of the complacency out of investors,” said Eric Wiegand, senior portfolio manager at U.S. Bank Private Client Wealth Management. “And while risks remain elevated from a geopolitical perspective, valuations are not necessarily excessive, though full. But we’re in a low inflationary environment, which can help valuations remain elevated for longer than they would otherwise.”
Read: Few investors are excited about stocks. Is that a reason to be?
Friday caps a week dogged by escalating tension between the U.S. and North Korea which culminated with President Donald Trump stating that his earlier threat to unleash “fire and fury” on North Korea “maybe wasn’t tough enough.”
However, an Associated Press report that the U.S. and North Korea have been engaged in back channel talks for several months even as they exchange incendiary threats helped to soothe some of the jitters.
For the week, the Dow is down 1.1%, its biggest one-week drop since November. The S&P shed 1.4%, its worst week since March, while the Nasdaq posted a weekly loss of 1.5%, its worst since June.
Related: A problem for buy-the-dip investors: no dips to buy
Meanwhile, the Russell 2000 index of small-cap stocks finished out the week 2.7% lower, its biggest one-week decline since February 2016.
Apart from geopolitical worries, some technical analysts like Tom McClellan, editor of the McClellan Market Report, blamed seasonality for this week’s retreat given August’s record as a weak month for stocks.
The headlines about North Korea served as a spark to jolt investors out of complacency on the heels of an extended period of calm in the market, said McClellan who shared the following chart in a report.
Wall Street’s so-called “fear gauge,” the CBOE Volatility Index VIX, -3.30% eased after hitting its highest levels since Election Day on Friday.
In the latest economic data, the consumer-price index rose a seasonally adjusted 0.1% in July, its fifth straight month of softness, raising more questions about whether inflation will eventually rise to hit the Federal Reserve’s 2% annual rate target.
Minneapolis Fed President Neel Kashkari, who has advocated for the Fed to halt interest rate hikes until inflation picks up gain, on Friday said his colleagues are telling each other “a ghost story” about higher wage inflation that scared them into raising short-term rates.
Outside the political arena, declines in a pair of technology stocks added to the cautious tone on the day.
Shares of Snapchat parent Snap Inc. SNAP, -14.09% slid 14% a day after the company’s earnings missed forecasts, and the social-messaging company disclosed that average ad prices fell in the second quarter.
Nvidia Corp. NVDA, -5.33% shares fell 5.3%, even after the chip maker posted upbeat earnings late Thursday. Some say expectations for its server-chip business were just too high. The stock has more than doubled over the past 12 months, gaining more than 160%.
Opinion: What to do with stocks if the U.S. and North Korea go to war
In contrast to the U.S. market, global equities remained weak. The Stoxx Europe 600 SXXP, -1.04% benchmark was down 1%, while Hong Kong’s Hang Seng HSI, -2.04% led the Asian losses with a drop of 2%.
An editorial in China’s state-run Global Times, published late Thursday local time, added to the pressure on Asian markets. Titled “Reckless game over the Korean Peninsula runs risk of real war,” the editorial suggested China will stay neutral if North Korea strikes first, but will intervene if the U.S. is the first mover.
“If the U.S. and South Korea carry out strikes and try to overthrow the North Korean regime and change the political pattern of the Korean Peninsula, China will prevent them from doing so,” the editorial’s authors said.
Stock movers: Nordstrom Inc. JWN, +0.07% shares edged up after the retailer posted earnings that beat expectations.
J.C. Penney Co. JCP, -16.56% slumped 17% after it reported a wider-than-expected second-quarter loss.
Other markets: Oil CLU7, +0.41% earlier fell after the International Energy Agency said oil supply rose for a third month as compliance with an OPEC output deal but have since recovered to settle higher.
Gold prices GCZ7, +0.38% posted strong weekly gains thanks to safe-haven demand.
Read: Dalio urges investors to buy gold to hedge against possible war with North Korea
--Barbara Kollmeyer contributed to this report.