The recent escalation of words and actions between North Korea and the United States has also sent jitters across global markets. The dollar has lost some strength since January with the currency index down nearly 10 percent. Investors have flocked to European equities and safe haven assets such as gold and the Japanese yen as a result.
European economy has been growing and showing signs of recovery. The performance of European companies, the reduced political risk, and the economic momentum have lured investors to scoop up equities. The CBOE Volatility Index, commonly referred to as the VIX, hit its lowest level since 1993 in May after President Emmanuel Macron was elected in France. But the index has started to edge higher on the back of geopolitical tensions in the Korean peninsula.
According to Christian Hille, head of multi asset at Deutsche Asset Management, the geopolitical escalation in North Korea leading to a risk-off movement which could trigger unwind of extensive short volume positions could also be a potential reason for a market correction.
“In general, going into Autumn with European Central Bank (ECB) and Federal Reserve meetings ahead, some misinterpretation/miscommunication (central bank failure) could lead to market stress with rates moving higher substantially, spread widening, equity market drop, etc,” he said, though highlighting that this isn’t his base case scenario.
