The FTSE 100 tumbled to a 16-week low as investors reacted to North Korea’s latest missile test by dumping shares on the London stock market.
Stocks listed in Paris and Frankfurt also fell on Tuesday and the dollar came under pressure, underscoring the flight from equities to safe haven assets, including gold.
The index of blue chip companies was down more than 1% before rallying to close at 7,337, down 64 points or 0.9%, following the news that a North Korean ballistic missile had flown over Hokkaido in northern Japan. The German Dax was the worst affected, falling by 1.5%, while the French CAC was down 1%.
David Madden, a market analyst at CMC Markets, said: “The standoff between the US and North Korea never went away, and as of last night it is back in the forefront of traders’ minds. Tensions have shifted up a gear, and dealers are dumping stocks while the political situation plays out.”
In London, financials were the biggest drag on the index, with the sector wiping more than 22 points off the index. Lenders Lloyds, Barclays and Standard Chartered all fell between 1.2% and 2%. In the energy sector, heavyweights BP and Royal Dutch Shell were both down about 1%.
The German banks Commerzbank and Deutsche Bank were among the top 10 losers in Frankfurt. But while European stock markets lost ground, the euro and the pound were seen by investors as safe haven currencies.
The euro has climbed two cents in as many days in reaction to the row brewing between Washington and Kim Jong-un’s administration. Last week, tensions appeared to ease, but the latest missile launch provoked a demand from Japan’s prime minister, Shinzo Abe, for further action against North Korea.
“The race to the safe havens has seen the dollar ditched, which is resulting in some fresh and unwelcome sterling and euro strength,” said Mike van Dulken, the head of research at Accendo Markets.
Some commentators said the euro’s status as a safe haven was increasing its value to a level where it was harming French and German exports, putting pressure on the European Central Bank to implement policies that will prevent the currency rising any further in value.
Surveys of business confidence in Germany have fallen back in recent weeks in response to the euro and its impact on the country’s exports.
Wall Street also suffered as the full impact of the heavy rains from tropical storm Harvey became clearer. More than 30 inches (76cm) have fallen in some areas, leading to widespread flooding, and close to two feet (60cm) more could fall over the next few days. Analysts said the cost of the storm could be about $50bn (£43bn).
Energy companies also suffered falls following reports that oil producers in Texas had shut wells as a precaution against the storms. The majority of US oil is produced in the Texas region and Goldman Sachs estimated that as much as 17% of production could be affected.
Many investors turned to gold as a safe haven, pushing up the price by $4 an ounce to $1,321.
In a sign of demand for the precious metal, the investment firm the Pure Gold Company said it had seen a sharp increase in people buying physical gold. Its chief executive, Josh Saul, said: “We have been taking orders from clients citing fears that tensions between the US and North Korea will escalate after North Korea’s latest missile test over Japan.
“President Trump has [previously] vowed to respond with ‘fire and fury’ and many of our clients believe this will make the situation considerably worse, increasing the unpredictability of the geopolitical situation.”
The firm reported a 78% increase in clients investing in physical gold on the expectation that the equity markets and the dollar will continue to slip while the gold price rallies.
“Physical gold investment from first-time purchasers has increased by 87% as they worry about market uncertainty in the face of such volatile world leaders,” Saul said.