World stocks fell for a third day yesterday and investors moved back into the Swiss franc, yen and gold as North Korea ratcheted up tensions with the US with a threat to land a missile just short of the US territory of Guam.

Markets had seen a tentative recovery in risk appetite in US and early Asian trading, but as the war of words resumed Asian stocks dropped back and London, Frankfurt and Paris all lost 0.5 to 1.2 per cent.

Futures markets were also pointing to a lower start for Wall Street, where missile makers have been the only significant gainers in recent days. Traders there were also digesting a rise in jobless claims and the biggest drop in producer prices in 11 months.

Currency traders consolidated positions in the Japanese yen and Swiss franc, and nudged up the dollar index by unwinding some of the recent big bets on the euro.

Although Japan could be in the front line of any clash with North Korea, the yen is benefitting because Japan is the world’s biggest creditor nation and Japanese investors tend to repatriate funds in times of stress, attracting other flows.

The euro was down 0.4 per cent at just over $1.17 and nearing a two-week low, while the New Zealand dollar tumbled a full one per cent as its central bank head bluntly said he wanted it lower.

“We saw a tentative recovery in risk appetite yesterday from the sell-off inspired by North Korea but I think justifiably that move is fading a little bit today,” said Saxo Bank’s head of FX strategy John Hardy.

“I think this situation is more critical that the market is actually respecting.”

Analysts said yields, which move inversely to prices, could fall further if the geopolitical tensions continue to rise – even if central bankers in the US continue to talk of raising interest rates or scaling back stimulus programmes.

The market’s main backstop in times of strain, gold, hit a two-month high of $1,282 an ounce amid the nervousness.

Steel and copper prices stayed strong in metals markets.

Oil also regained momentum as data pointed to declining US inventories. Brent crude was up 80 cents at $53.50 a barrel and US crude was up 60 cents and back up to $50.

There have been some markets which have benefitted from the US-North Korean sabre rattling.

Missile makers Raytheon and Lockheed Martin have outperformed Wall Street by almost four per cent in recent days and the Dow Jones US defence index is at a record high and on a seven-day unbroken run of gains.

Sociedad Quimica y Minera de Chile, one of the world’s largest producer of iodine – a substance used to combat radiation – has seen its share price increase by over a third since July.