(Bloomberg) -- U.S. equity futures fell, trimming last week's advance, as traders expressed anxiety over North Korea's test of a hydrogen bomb.
September contracts on the S&P 500 Index were down 0.4 percent at 6:21 p.m. in New York, following five days of gains in the cash market. U.S. traders are using an overnight session of CME Group's electronic platform to transact equity futures on a holiday weekend before exchanges reopen Tuesday.
Sunday's nuclear test, the first since President Donald Trump took office, is another strain for U.S. investors who have mostly been inured to geopolitical intrigue. An overnight selloff last Tuesday that followed North Korea's launching of a missile over Japan was erased by the close of the cash session.
At the same time, traders entering the calendar's worst month for stocks must decide at what point overseas provocations start to matter. The S&P 500 has climbed 11 percent in 2017 and the Nasdaq Composite Index is up 20 percent, gains that would look impressive if they held through December. Along with North Korea, bulls are weighing a debate over government funding in Washington and the ongoing withdrawal of Federal Reserve stimulus.
“The more you hear these kinds of threats the more you get the anxiety,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, who helps oversee $35 billion. “Part of this anxiety might be because we've had such a smooth run in the stock market, and some investors are afraid that the tide will soon turn.”
On Sunday, Trump threatened to increase economic sanctions and halt trade with any nation doing business with North Korea, and his defense chief said the U.S. has “many military options” after that nation said it successfully tested a hydrogen bomb with “unprecedentedly big power.”
Outside the White House Sunday afternoon, Defense Secretary James Mattis told reporters that Trump and Vice President Mike Pence met with him and other national security advisers about the hydrogen bomb detonation. Mattis promised a “massive military response -- a response both effective and overwhelming” if the U.S. or any of its allies are threatened.
The yen and the Swiss franc strengthened early Monday in Asia while Treasury futures climbed. The U.S., Japan, France, the U.K. and South Korea have called for an emergency meeting of the United Nations Security Council on Monday, UN Ambassador Nikki Haley said on Twitter.
“We could still see a flight to safety with a stronger yen, weaker equity markets, and lower government bond yields, but a nuclear test is different than lobbing a missile over Japan,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management. “The threat isn't quite as imminent with a test as it is with a launch.”
The S&P 500 rose 1.4 percent last week and ended August with a gain of less than 0.1 percent, the smallest increase since March though still the ninth advance in 10 months. The Dow Jones Industrial Average added 174 points over the five days, while the Nasdaq Composite Index rallied 2.7 percent to a record.
September is historically a rough month for U.S. stocks, with equities on average losing about 1 percent, data compiled by S&P Global show. Traders have recently been taking precautions, with put contracts on the largest exchange-traded fund tied to the S&P 500 outnumbering calls by 2-to-1.
“We might see a rotation to some of the safer assets, but the question is how long it lasts,” said Key's McCain. “If we end up having serious economic implications as a result of the escalation of this situation, the rotation might last longer than some would expect.”
To contact the reporters on this story: Divya Balji in Singapore at dbalji1@bloomberg.net, Elena Popina in New York at epopina@bloomberg.net.
To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi, Eric J. Weiner
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