Futures on the S&P 500 Index slid as reports North Korea fired a missile over Japan rekindled geopolitical angst two weeks after the U.S. president warned aggression would be answered harshly.
September contracts dropped 0.7 percent as of 6:50 p.m. in New York. An exchange-traded fund tied to the equity benchmark, ticker SPY, lurched just after 5 p.m., losing about half a percent in five minutes, before futures opened and extended the decline. The missile probably landed off the eastern coast of Hokkaido, according to Japanese broadcasting service NHK.
“Things could spin out of control,” Erick Ormsby, chief investment officer of Alcosta Capital Management in San Ramon, California, said by phone. “Investors are worried that Trump will do something to cause an attack on North Korea. If that happens, you’d have a lot of uncertainty as to where that goes. It’d elevate everything quickly to a tenuous point.”
Futures on the CBOE Volatility Index rose 7 percent after the VIX closed the Monday session at 11.3, down from its 2017 high of 16.04 reached Aug. 8.
“In an environment where equities have been rather soft recently, the news causes me and our firm to have concerns about the stability of equity prices,” said Tim Ghriskey, the chief investment officer at Solaris Asset Management in New York. “We already see that it’s causing significant fear in the aftermarket. It could be a very messy day in the market tomorrow, especially if the situation escalates.”
Some of the stock market’s biggest swoons have recently come amid anxiety over North Korea. Japanese Prime Minister Shinzo Abe told reporters in Tokyo that the missile appeared to have passed over Japan airspace and that the government was collecting intelligence on the incident and ensuring the safety of citizens, according to remarks broadcast on NHK.
Two weeks ago, the S&P 500 halted an unprecedented stretch of calm in American equity markets and the CBOE Volatility Index spiked to its highest since April after Trump dialed up his warning on threats to American allies. He said on Aug. 8 that North Korea will be “met with fire and fury and, frankly, power the likes of which the world has never seen before” if Kim Jong Un’s regime keeps making threats.
The after-hours reaction in futures followed a relatively calm session in which investors weighed damage from Tropical Storm Harvey on Texas. In regular trading Monday, U.S. stocks ended mixed, oil declined and gold broke through $1,300 an ounce.
“As of now, it looks like a knee-jerk reaction to a surprising piece of news,” Frank Cappelleri, a technical analyst at Nomura Instinet LLC, said of the futures trading. “Similar occurrences to other geopolitical events have come and went without a major long-term effect the last few weeks.”
On Saturday, North Korea fired three short-range ballistic missiles, a move that came after Kim Jong Un’s regime strongly criticized U.S.-South Korea joint military drills. U.S. Pacific Command said that afternoon that two of the missiles flew 250 kilometers (155 miles). The other appeared to have blown up immediately.
The U.S. and its allies have warned Kim against following through with a threat to launch missiles toward Guam, home to key American military bases in the Pacific. Japan earlier this month deployed four Patriot missile interceptors into the western part of the country, which would be under the flight path toward the U.S. territory.
North Korea has conducted more than a dozen missile tests this year, including two ICBMS, leading to a war of words earlier this month between Trump and Kim’s regime that rattled global markets. Tensions cooled in recent weeks, with Trump saying last Tuesday that Kim was beginning to respect the U.S.