Muted market reaction to North Korea missile launch

Investors have become accustomed to a cycle of provocations

Tensions had resurfaced on Thursday, when the Nikkei reported Pyongyang was preparing another missile launch

Financial markets are once again showing a short-lived reaction to a North Korean missile launch as investors become accustomed to a cycle of provocations followed by diplomatic censure and sanctions that fall short of shutting down the dictatorship.

South Korea’s Kospi index rebounded from an earlier decline and US stock futures pared losses, while equities in Tokyo traded sideways, showing a muted broader market reaction to the latest North Korean provocation. The yen flat-lined after an initial jump.

Tensions had already resurfaced on Thursday, when the Nikkei reported that Pyongyang was preparing another missile launch. Ten-year Treasury yields were little changed after data showing US inflation quickened, supporting an uptick in expectations for a Federal Reserve rate hike.

"I wouldn't necessarily say this is an escalation," James Soutter, portfolio manager at K2 Asset Management in Melbourne, said of the missile launch. "This is more of a continuance of provocation. Hence markets won't like it, but I don't think it's necessarily the precursor to a sustained market pullback."

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Markets are showing signs of becoming conditioned to actions from North Korea, which has launched more than a dozen missiles this year and tested a nuclear device.

Initial reactions have become short lived - stocks swiftly recovered from losses following another missile over Japan on August 29th.

Global equities climbed to a record high this week as earnings and faith in economic growth overshadow the escalation of tensions on the Korean Peninsula. The MSCI All Country World Index is poised for its third week of gains in four.

"This missile firing, we have seen it before and we also now sort of know how maybe the international community will respond," Intellectus Partners chief economist and credit portfolio management head Ben Emons told Bloomberg Television.

“You get a classic risk-off reaction that subsequently gets muted again.”

Thursday’s US economic data lent support to those expecting a further run up in US bond yields as inflation topped estimates and traders increased bets on another rate hike in 2017. While China data this week softened, the signals emanating from financial markets remain decidedly bullish.

Meanwhile, Bitcoin has slumped 20 per cent so far this week. China has notified regional regulators that it aims to stop exchange trading of cryptocurrencies by the end of September, according to people familiar with the matter.

-Bloomberg