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North Korea's nuclear test rattles Asian markets, driving gold and the yen higher

Key Points
  • North Korea says it conducted its sixth nuclear test on Sunday
  • Gold and the yen were supported by safe haven demand; stocks fell
  • South Korea said Monday afternoon that the North was preparing to conduct more missile launches
  • U.S. nonfarm payrolls for August were weaker than expected

Safe haven demand drove up gold and the yen while equities in Asia closed down after after North Korea said it tested a hydrogen bomb over the weekend. Stocks were further pressured on Monday headlines that the North was planning future missile launches.

The Kospi fell 1.19 percent, or 28.04 points, to end at 2,329.65. Blue chips sold off across sectors: Samsung Electronics was down 0.95 percent and Hyundai Motor tumbled 2.1 percent.

South Korean markets have retraced losses fairly quickly in the past following North Korean saber-rattling, but the benchmark index has taken slightly longer to recover after the latest provocations.

Japan's declined 0.93 percent, or 183.22 points, to close at 19,508.25. Markets could be set for further downside when U.S. markets resume trade after Monday's Labor Day holiday, Reuters reported.

Down Under, the S&P/ASX 200 slid 0.39 percent to finish at 5,702, with declines seen across most sectors. The heavily-weighted financials sub-index was down 0.64 percent, with gold miners rising.

Greater China stocks were mixed, with mainland markets shrugging off geopolitical tensions in the region. Hong Kong's Hang Seng Index slipped 0.9 percent by 3:00 p.m. HK/SIN. On the mainland, the rose 0.38 percent, or 12.7170 points, to close at 3,379.8364 and the Shenzhen Composite climbed 0.602 percent, or 11.7694 points, to close at 1,968.1219.

Malaysia and Vietnam markets are closed for public holidays.

Asia-Pacific Market Indexes Chart

Already supported by safe haven demand following North Korea's Sunday nuclear test, gold prices and the yen were further boosted by news from South Korea's Yonhap close to the market close that the hermit state was preparing another missile launch.

After trading around the 109.8 handle for most of the Asian session, the dollar retreated further to fetch just 109.39 yen at 2:22 p.m. HK/SIN on the headlines. The greenback had fallen as low as 109.29 earlier in the session, which compared to Friday's close above the 110 handle.

The Swiss franc, also regarded as a safe haven currency during times of uncertainty, rose to trade at 0.9589 francs to the dollar from the 0.965 handle seen last Friday. The currency strengthened as high as 0.9576 on the latest news.

The Korean won traded near its lowest levels in almost two weeks following the ramp up in tensions, tumbling against the greenback to trade at 1,132.30 won to the dollar. That compared to trades around the 1,120 level seen in the last session.

Meanwhile, spot gold traded a leg higher at $1,336.91 an ounce compared to the $1,333 handle seen most of the session, around its highest levels in around 11 months.

Some market watchers suggested prior to the latest news that the jump in prices of safe haven assets was a knee-jerk reaction that could soon blow over.

"Unless this is the precursor to U.S. military action — which we doubt — then in a little over a day or two, tensions will calm again, and so will markets," ING Asia Head of Research Rob Carnell said in a morning note.

Pedestrians walk past a monitor showing an image of North Korean leader Kim Jong Un in a news program reporting on North Korea's 6th nuclear test on September 3, 2017 in Tokyo, Japan.
Tomohiro Ohsumi | Getty Images

North Korea claimed on Sunday that it had conducted a test of a hydrogen bomb meant to be carried by a long-range missile. The test — which the North called a "perfect success" — was estimated to have an explosive yield of up to 100 kilotons, news agency Yonhap reported a South Korean lawmaker as saying.

President Donald Trump called North Korea's latest test "hostile and dangerous." When asked about the possibility of a U.S. military attack in response to the North's latest actions, Trump told a reporter, "We'll see."

Trump also suggested on Twitter that the U.S. was considering "stopping all trade with any country doing business with North Korea " as a potential response. The move, if implemented, would likely affect China — North Korea's most important trading partner.

The Sunday test came on the back of heightened geopolitical tensions in the region. The North had launched a missile that flew over Japan just a few days prior.

While analysts acknowledged simmering tensions on the peninsula could remain, full-scale military conflict is thought to be unlikely.

"We expect North Korea to count its chips and continue its current game of brinkmanship, but also remain sufficiently restrained to not cross any implicit red lines," Mizuho Bank FX Strategist Chang Wei Liang said in a note.

Markets also continued to digest weaker-than-expected U.S. employment data released on Friday. U.S. nonfarm payrolls for August showed 156,000 jobs were created, below the 180,000 forecast by economist in a Reuters poll.

Despite the miss, equities in the U.S. closed higher on Friday, with the Dow Jones industrial average rising 0.18 percent to close at 21,987.56.

In corporate news, Malaysia's Petroliam Nasional Berhad, or Petronas, said on Saturday it was not interested in acquiring a majority stake in Daewoo Engineering & Construction, Reuters reported. South Korean media had reported that Petronas was interested in the deal on Friday. Daewoo shares closed down 4.44 percent.

The early surge in Korean defense stocks moderated later during the session. Shares of military systems maker Victek outperformed, closing up 19.04 percent, but other defense plays were subdued: Hanwha Techwin erased earlier gains to decline 1.68 percent while Korea Aerospace was off 2.08 percent by the close.

On the energy front, Brent crude futures declined 0.8 percent to trade at $52.33 a barrel. U.S. West Texas Intermediate tacked on 0.02 percent to trade at at $47.30. Meanwhile, U.S. gasoline futures extended losses made on Friday, falling 3.53 percent to trade at $1.6862 a gallon after September futures climbed above the $2 level before their expiry last week.

Following Tropical Storm Harvey, some pressure had been taken off U.S. crude and gasoline futures, OANDA Senior Market Analyst Jeffrey Halley said in a note.

"It appears that damage to refining capacity is minimal, and with only 5.5 percent now offline from 25 percent a week ago, traders are hopeful that crude backlogs will be cleared," he added.

Meanwhile, the dollar index, which tracks the greenback against a basket of six major currencies, edged down to 92.588 at 2:36 p.m. HK/SIN.

— CNBC's Leslie Shaffer contributed to this report.