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Nuclear Fears Wipe $1 Trillion Off Global Stock Markets

Threats of global cataclysm tend not to inspire market confidence.

LONDON, Aug 11 (Reuters) - The damage inflicted on world stocks this week by the escalating war of words over North Korea topped US$1 trillion (C$1.27 trillion) on Friday, as investors again took cover in the yen, the Swiss franc, gold and government bonds.

With the tense mood pushing European shares down for a third day and Wall Street set to fall again, global stocks were on course for their worst week since Donald Trump won November's U.S. presidential election.

Now installed in the White House, Trump issued a new warning to Pyongyang on Friday, tweeting: "Military solutions are now fully in place, locked and loaded, should North Korea act unwisely."

North Korea had responded to Trump's previous promise to unleash "fire and fury," with a threat to land a missile near the U.S. Pacific territory of Guam.

Japanese markets were closed for a holiday but the yen powered on, hitting an eight-week high of 108.91 yen to the dollar, adding to its biggest weekly gain since May.

The yen tends to benefit during times of geopolitical or financial stress as Japan is the world's biggest creditor nation and there is an assumption that Japanese investors there will repatriate funds should a crisis materialize.

U.S. President Donald Trump speaks to reporters after a security briefing at his golf estate in Bedminster, New Jersey, August 10.
Jonathan Ernst / Reuters
U.S. President Donald Trump speaks to reporters after a security briefing at his golf estate in Bedminster, New Jersey, August 10.

The Swiss franc, the other traditional safety-play among currencies, has benefited too. Two weeks ago it saw its biggest weakly fall against the euro since the start of 2015. This week has seen its biggest rise since June 2016.

And in bond markets, 10-year U.S. Treasuries and Germany's ultra-safe government bonds, known as Bunds, were trading at their highest prices since June.

"We do just not know what happens next with the North Korea situation," said BNY Mellon FX strategist Neil Mellor.

"For quite some time the market hasn't really reacted to things on the Korean Peninsula because we know from the past it is largely North Korean saber-rattling, and it may yet be. But with the rhetoric having gone to a different level, the market just can't afford to take that risk."

Many world stock markets have hit record or multi-year highs in recent weeks, leaving them vulnerable to a sell-off, and the tensions over North Korea have proved the trigger.

Check out the latest news on the North Korea crisis:

The CBOE Volatility Index, the most widely followed barometer of expected near-term U.S. stock market volatility, hit its highest mark since Nov. 8, when Trump was elected president.

The Chinese volatility gauge jumped by the most since January 2016, to its highest level in more than seven months. The euro zone's version is at its highest since April, when France's election was rattling the region.

Overnight, MSCI's broadest index of Asia-Pacific shares outside Japan had skidded 1.55 percent, its biggest one-day loss since mid-December, to leave it down 2.5 percent for the week.

"What has changed this time is that the scary threats and war of words between the U.S. and North Korea have intensified to the point that markets can't ignore it," said Shane Oliver, head of investment strategy at AMP Capital in Sydney.

"Of course, it's all come at a time when share markets are due for a correction, so North Korea has provided a perfect trigger."

New Cuban crisis?

South Korea's KOSPI fell 1.8 percent to an 11-1/2-week low, but its losses for the week are a relatively modest 3.2 percent. "Pretty remarkable, perhaps even extraordinary, considering," said Tim Ash, strategist at fund manager BlueBay.

The Korean won also continued to skid, down 0.45 percent to 1,147.2, falling below its 200-day moving average for the first time in a month.

Australian shares were down 1.3 percent, set for a weekly loss of 0.6 percent and Chinese and Hong Kong bluechips lost 1.6 percent and 1.9 percent respectively.

A Chinese state-run newspaper said on Friday that China should make clear that it will stay neutral if North Korea launches an attack that threatens the United States, but that if the U.S. attacks first and tries to overthrow North Korea's government, China will prevent it doing so.

"This situation is beginning to develop into this generation's Cuban Missile crisis moment," ING's chief Asia economist Robert Carnell wrote in a note.

(Additional reporting by Nichola Saminather in Singapore, Abhinav Ramnarayan in London; Editing by Catherine Evans)

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