U.S. stocks fell Tuesday after U.S. President Donald Trump warned North Korea that any threats would be met with “fire and fury like the world has never seen.”
The reportedly unscripted remarks followed reports earlier in the day that North Korea has successfully created a miniaturized nuclear weapon designed to fit inside its missiles. Less than two weeks earlier, the North Korean government tested an intercontinental ballistic missile that experts said could reach as far as New York.
Then overnight, North Korea state media said it is “carefully examining” a plan to strike the U.S.-held Pacific island of Guam with missiles.
However, U.S. State Secretary Rex Tillerson downplayed the latest developments in remarks to reporters on his way to Guam Wednesday. “I do not believe there is any imminent threat in my own view,” Tillerson said.
Analysts said Beijing is the bigger factor around the North Korea tensions since more than two thirds of the rogue state’s trade is with China. For its part, Beijing is likely going to do all it can to maintain the status quo ahead of a leadership shuffle this fall at the 19th Communist Party Congress.
“The last thing [the Chinese] need is a problem. Most likely this is going to be another situation … one, two, three days of vol and then it goes away,” Larry McDonald, of The Bear Traps Report newsletter, told CNBC in a phone interview.
The Chinese Foreign Ministry reiterated its call for dialogue and negotiation in a statement to CNBC.
“China calls for all related parties to insist on moving in the direction of resolving the nuclear issue on the Korean Peninsula through political means,” the ministry said.
The jump in the South Korean credit default swap contrasted with the muted risk-off trade in global markets.
Overnight in Asia, the South Korea Kospi fell 1.1 percent to about 3.5 percent from a record high hit July 25. The Nikkei 225 dropped 1.3 percent, while the Shanghai composite slipped only 0.2 percent.
U.S. Treasury yields edged slightly lower, with the 10-year yield at 2.24 percent.
Gold spiked more than 1.5 percent to $1,284.70, its highest since June 8, while the CBOE Volatility Index (.VIX), widely considered the best gauge of fear in the market, climbed to a high of 12.63, its highest since July 6.
U.S. stocks closed slightly lower Wednesday, but the S&P 500 and Dow Jones industrial average remained within 1 percent of all-time highs.