While you were sleeping: Stocks slide on nuclear tensions

A trader works on the floor of the New York Stock Exchange. Photo / AP

European equities declined while German bunds rose, following North Korea's most powerful nuclear test and reports it might launch another ballistic missile.

US Ambassador to the United Nations Nikki Haley said Monday that North Korea's Kim Jong Un was "begging for war" and urged the UN Security to adopt the strongest possible sanctions on the country.

Europe's Stoxx 600 Index dropped 0.5 per cent. Germany's DAX Index fell 0.3 per cent, while France's CAC 40 Index declined 0.4 per cent and the UK's FTSE 100 Index also slid 0.4 per cent.

"There is no reason to expect the current level of tensions to diminish in the near term," said Capital Economics chief global economist Andrew Kenningham in a note. "The South Korean government has suggested that Kim Jong Un's regime is preparing further missile tests and North Korea is unlikely to back down in the face of US sabre-rattling."

"Aside from the risk of outright conflict, we think the biggest concern is of an escalation of trade tensions between the US and China," Kenningham noted.

German bunds gained, sending the 10-year yield one basis point lower to 0.37 per cent.

"The trend in recent months has been for knee-jerk risk-averse reactions to geopolitical events to be followed by a gradual recovery in risk sentiment as global monetary accommodation has its usual pacifying effect in markets," Societe Generale strategist Kit Juckes told Reuters.

"A repeat of that pattern seems eminently possible this week."

US financial markets were closed for the Labour Day holiday.

"Expect some short-term risk-aversion trades," Citigroup economists led by Johanna Chua wrote in a client note, Bloomberg reported. "But such market moves tend to be short-lived, as typically tensions defuse quickly. So unless the global response to this test raises the probability of a military strike or North Korean regime collapse (both unlikely), this time may play out similarly."

Beyond geopolitical tension, this week offers the return of US Congress, on Tuesday, from summer recess as well as a policy meeting by the European Central Bank's Governing Council.

Congress has until September 29 to raise the debt ceiling, or the maximum amount of debt the federal government can carry at any time, and stave off a US default.

Meanwhile, ECB policy makers gather on Thursday. President Mario Draghi will express concern over the euro's strength, but won't say much about his asset-purchase program's future, according to a Bloomberg survey.

First, a host of US policy makers are slated to speak in the coming days, and will be closely watched for any hints on the unwinding of the Fed's balance sheet and the potential for a third rate hike this year. Lael Brainard, Neel Kashkari and Robert Kaplan speak on Tuesday, followed by Loretta Mester, William Dudley and Raphael Bostic on Thursday, and Patrick Harker on Friday.