Wall Street Stages Recovery, but North Korea Keeps Rally From Takeoff

European Shares Plummet

European Shares Plummet

However, Federal Reserve Bank of New York President William Dudley suggested on Thursday that the central bank was on track to raise interest rates once more as he expects sluggish inflation to rise over the next several months.

Hope that the Fed will have to slow its rate hike path appeared to stop, at least for now, the near $1-trillion loss in world stocks valuations this week triggered by the war of words between Pyongyang and the United States.

"The data confirms the Fed will have a wait-and-see attitude", said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco. Nine of the index's 10 main groups ended lower.

Cracks are showing in what has been a virtually non-stop US equity rally after a rapid escalation of tension between North Korea and the United States this week. Australia's S&P/ASX 200 dropped 1.2 percent.

"If earnings can stay strong and interest rates remain low investors can look beyond North Korea and continue to rally equities", Phipps said.

The Dow Jones Industrial Average fell 0.9 per cent to end at 21,844.01, the only close below 22,000 since breaking through that level for the first time August 2.

MSCI's broadest index of Asia-Pacific shares outside Japan skidded 1.2 percent in its third session of declines, heading for a 2.1 percent drop for the week. The Russell 2000 index of smaller-company stocks picked up 1.69 points, or 0.1 percent, to 1,374.23.

Sterling was last trading at $1.3007, up 0.25 percent on the day.

"Pretty remarkable, perhaps even extraordinary, considering", said Tim Ash, strategist at fund manager BlueBay. "Although it is considered highly unlikely that this tension will escalate into a nuclear war, the market still needs to see how President Trump will eventually deal with his advocating "fire and fury" against North Korea's threat", said Margaret Yang Yan, market analyst at CMC Markets Singapore.

Until this week, the equity market had managed to shake off negative news, including previous saber-rattling over North Korea and failures in Washington to pass high-profile bills, such as repealing and replacing Obamacare.

Although Japan could be in the front line of any clash with North Korea, the yen is benefitting because Japan is the world's biggest creditor nation and Japanese investors tend to repatriate funds in times of stress, attracting other flows.

The US producer prices data was slightly below consensus forecasts with both headline and core prices declining 0.1% on the month.

The Korean won also continued to skid, sliding 0.4 percent to 1,146.2, below its 200-day moving average. Basically if the streak of trading days without a 1%+ up or down day is going to be broken, it's better for it to break with a 1%+ down day than a 1%+ up day.

The euro fell a quarter-of-a-percent against the dollar to trade at $1.1728 as European markets opened.

Benchmark 10-year notes US10YT=RR were last up 12/32 in price to yield 2.201 percent, from 2.242 percent late on Wednesday.

The 30-year bond last /32 in price to yield 2.7933 percent, from 2.794 percent late on Thursday.

The market's main backstop in times of strain, gold, hit a two-month high of $1,282 an ounce amid the nervousness.

An Associated Press report that the US and North Korea have been engaged in back channel talks (https://apnews.com/686ac7c761694b28b67793a1d8297145?link=mktw) for several months even as they exchange incendiary threats may also help to soothe jitters.

Ongoing global glut concerns lingered in oil markets despite a bigger-than-expected draw in USA crude inventories.

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