American equity markets tumbled in Tuesday trading as tensions in North Asia weighed heavily on stocks around the world. The Dow finished lower by 1.3% while the S&P 500 and the Nasdaq both slumped by 1.5% on the day. This also helped to spook investors back into assets perceived to be safer, such as gold and Treasury Bonds, which both saw solid gains on the day. Gold finished ahead by $18/oz. to close just under $1380, while yields in the government debt market slipped across virtually all time horizons. The uncertain market didn’t help a variety of foreign currencies either as the U.S. dollar index surged higher by 1.3% on the day as traders reevaluated their positions in risky assets.
While the situation remains tense over the ongoing debt crisis in Ireland, all investors focused in on the rapidly escalating situation brewing on the Korean peninsula. Earlier today, North Korean shells rained down on South Korean soil for the first time in almost 60 years, an event that sparked a quick retaliatory strike by the South and threats of further retaliation if the North continues with its aggressive stance. Fears over another Korean war scared off many traders who were already wavering given the increasingly uncertain environment in Europe, which remains cloudy to say the least. “We were poised to go lower, and it was just waiting for the right catalyst. We’ve got the perfect blend today as far as what happened in South Korea and with the European fears continuing to fester,” said James Dailey, portfolio manager of the Team Asset Strategy Fund [read more about the Korean crisis here].
One of the biggest ETF winners on the day was the SPDR Gold Trust (GLD), which gained 1.7%. Today’s gains came as traders fled risky assets thanks to increased tensions in the Koreas, which made many reevaluate their allocations to a variety of markets. Interestingly, GDX usually outperforms GLD, as the equity based fund represents a leveraged play on the price of gold. However, this was evidently not the case today as traders shunned equities across the board, embracing the yellow metal as a much safer play in today’s environment. “Any time you have conflict and war, gold is always a safe haven play you can go to,” said Spencer Patton, founder and chief investment officer for hedge fund Steel Vine Investments LLC. “On a day when it should be lower, it really was strongly higher, which is just a great sign for gold going forward.” [see fundamentals of GLD here]
One of the biggest losers in the ETFdb 60 was the Vanguard European ETF (VGK), which tumbled by 4.8% on the day. Today’s sharp losses came as traders dumped European equities thanks to spreading fears over a European debt contagion. According to Bloomberg, national benchmarks in all 18 Western European nations declined while the main indexes in Ireland, Spain, Portugal, and Italy all fell by more than 2% on the day. It’s not “surprising that the market should be playing the domino game and probably shooting for the next most vulnerable member of the euro zone,” said Andreas Utermann, chief investment officer at the RCM unit of Allianz Global Investors on Bloomberg Television. “The Irish government’s troubles now demonstrate quite clearly that there is a lot of political risk involved.” [see more charts of VGK here]
Disclosure: Eric is long VGK.