Geopolitical tensions on the Korean Peninsula once again attracted the world's focus on Tuesday, after North Korea's reclusive regime fired a ballistic missile over Japan, drawing unsurprisingly widespread condemnation from across the world. 

North Korea has conducted dozens of ballistic missile tests under young leader Kim Jong Un, but firing projectiles over mainland Japan is his first. The test fueled worries of fresh tension between Pyongyang and Washington, which could lead to a conflict with the nuclear-armed secluded nation.

Read more: What is China's role in the North Korean crisis?

It prompted investors to reduce exposure to risky bets and turn to safe-haven assets. "We are seeing a classic risk-off pattern after Pyongyang fired the ballistic missile," said DZ Bank analyst Rene Albrecht, pointing to US Treasuries, Japanese yen and gold as examples of safe haven assets that are all in demand on Tuesday.

Rush to safety

While Asian and European equity markets were down Tuesday, the Japanese yen rallied. The yen tends to benefit during times of geopolitical or financial stress because Japan is the world's biggest creditor nation and there is an assumption that Japanese investors will repatriate funds should a crisis materialize.

Gold, meanwhile, climbed 1.9 percent to near 10-month highs of $1,322 per ounce. The metal also drew support from uncertainty surrounding US President Donald Trump's administration after remarks last week raised fears of a government shutdown. Investors also rushed to the safety of US Treasuries, pushing down the 10-year yield to a low of 2.102 percent, its lowest since mid-November.

Read more: Where did North Korea get its missile technology?

Though the risk-averse mood prevailed broadly across financial markets, the euro appeared immune to the geopolitical news.

The single currency surged above 1.20 to the dollar, breaching a key level as investors grew bullish about its outlook after the head of the European Central Bank, Mario Draghi, refrained from talking about the currency's recent strength and against the backdrop of brewing US fiscal problems.

"The market is still digesting Draghi's comments from Jackson Hole and the US outlook is looking difficult with concerns around the budget and a looming shutdown," said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.

Pyongyang's latest test added to the US currency's problems, with the dollar struggling against its major rivals and falling to more than a 2-1/2 year low against a trade-weighted basket. The greenback had already been suffering selling pressure as expectations for another Federal Reserve interest rate rise faded in recent weeks.

"The dollar continues to suffer from the Trump reality check," noted Oanda analyst Craig Erlam. "Geopolitical tensions, troubles within the White House and Congress, and now Hurricane Harvey pile further pressure on the greenback," he said.

Bond yields down

A stronger euro also put downward pressure on euro zone government bond yields. Germany's borrowing costs hit their lowest level in months on Tuesday, with the yield on the nation's 10-year government bond - which serves as the benchmark for the euro zone region - dropping 3 basis points to 0.34 percent.

The yield on short-dated German "Schatz," sank further into negative yielding territory, hitting its lowest level in over four months at minus 0.76 percent.

The move was particularly eye-catching given that Germany is due to sell 5 billion euros of two-year bonds later on Tuesday. Under normal circumstances, investors sell outstanding bonds just ahead of a bond sale to make space for the new supply, pushing yields higher.

The gap between lower-rated Southern European government bond yields and their better-rated counterparts increased, and Italy's 10-year bond yield spread over Germany widened 3 basis points to 175 basis points. "In times of higher political tensions, there is more demand for Bunds than for peripheral bonds," said Albrecht of DZ Bank.

sri/uhe (Reuters, AFP)