Markets spooked as war of words escalates

Developments in the North Korea situation have unnerved investors, with US markets under pressure on the first day of the new week.

• Pyongyang heats up the rhetoric
• Miscalculation dangers rise
• Draghi finally talks down the euro

US stocks underwent a sharp wave of selling as North Korea decided to respond to the weekend’s events by declaring that it viewed Mr Trump’s comments as a ‘declaration of war’. This looks like a fairly hefty step up in the escalation game, and one that is sure to provoke a US response of some kind. Tech stocks were hit hardest, with the Nasdaq already stumbling thanks to the poor debut of Apple’s new phone models. North Korea is clearly rattled; the bomber flights at the weekend remind Pyongyang of its inherent vulnerability and its clear disadvantages when it comes to high-tech weaponry. The risks of miscalculation have now multiplied alarmingly, and markets may well continue to respond
 negatively.

A day relatively free of big corporate news has meant that the focus is squarely on the euro. In Brussels ECB president Mario Draghi seems to have decided that the time has come for a bit of judicious ‘talking down’ of the euro. While at the most recent ECB meeting he seemed unperturbed by the euro’s strength, today’s comments show that the rise in the single currency is clearly causing him to lose some sleep. With a nod to inflation weakness, he has suggested reminded everyone not to get too carried away with the idea of tapering, since more easing could still be needed. This is Mr Draghi carefully hedging his bets, but with Germany now somewhat distracted by coalition forming the ECB
 needs to keep the show on the road. If more QE is the means to achieve this, so be it.