Interactive Investor

Is North Korea crash a buying opportunity?

29th August 2017 13:07

David Brenchley from interactive investor

Fears over North Korea's nuclear capability were re-ignited Tuesday as the rogue state fired a ballistic missile over Japan. It landed in the Pacific, less than 1,200 kilometres from the Japanese mainland, close enough to trigger a scramble into safe haven assets.

The FTSE 100 slumped112 points, or 1.5%, in early trade to a low of 7,289, following the lead of Asian markets. It will also make for a tough session on Wall Street where Hurricane Harvey creates a double headwind. Conversely, the gold price, and demand for the precious metal, has surged.

Japanese prime minister Shinzo Abe called the missile launch an "unprecedented and grave threat" to his country's security that "greatly damages regional peace and security".

It comes just three weeks after North Korea threatened that one of its nuclear weapons could strike the island of Guam, a US Pacific territory and home to a huge US airbase. That provoked president Donald Trump's "fire and fury" comment.

This time, Trump said the US stood "100% with Japan", and Mr Abe said both he and the president had agreed to increase pressure on North Korea.

Consequently, the gold price surged 1.2% Tuesday to $1,331, its highest since September 2016. It's now above Panmure Gordon's 2017 price target of $1,300, yet the broker thinks it could rise further.

"Over the next quarter gold can push higher, testing the $1,350 threshold," said chief economist Simon French. That's despite economic uncertainty having pared back from historic highs recently.

"Strike risk remains elevated across a number of geographies and provides a supportive backdrop for physical gold and gold mining equity exposure," explains French.

Source: Panmure Gordon

According to chartists, the FTSE 100 remains on track to reach 8,000. And, as we've discussed previously when concerns about North Korean leader Kim Jong-un hit sentiment last time, is the reaction overdone

Then, the market dived, but recovered almost 150 points in subsequent sessions. Will the same happen again? It's possible, given even Trump insiders admit there's little chance of an unprovoked strike against the North. It must be unlikely, too, that Kim would begin a conflict that could only end badly for him.

What is clear is that the FTSE 100 has almost a magnetic attraction to 7,300, touching the big figure regularly this summer. Support has kicked in each time, triggering gains. Watch this number carefully. A confirmed break below could spell trouble.

On Tuesday, the FTSE 100 leaderboard was a sea of red, with just a hint of green. The big winners were, of course, gold miners. Randgold Resources and Fresnillo top the table, with gains of around 5% and 3% respectively.

Others, among them equipment rental firm Ashtead and real estate giants Segro and British Land, showed gains on the day, but they were insignificant.

At the other end of the board, Standard Life Aberdeen, the newly merged fund house, was one of the worst hit, slipping 2.4%. Its funds have an Asia focus, so any deterioration in sentiment towards the region is a big negative.

Supermarket chain Morrisons struggled, down 3%, while building materials company CRH and engineer Smiths Group are in a race to the bottom.

Other weak performers include media giant ITV, friendless for the past four months and now sitting at a post-Brexit vote low. Carolyn McCall, who takes over in January, will have her hands full. High-street lender Lloyds and packager Smurfit Kappa are off the pace, too. So is Ferguson, the popular plumbing supplier formerly known as Wolseley, which makes most of its money in the US. It's now trading near a 10-month low.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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