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North Koreans holding national flags march during a parade to mark the 60th anniversary of the signing of a truce in the 1950-1953 Korean War at Kim Il-sung Square, in Pyongyang July 27, 2013.REUTERS/Jason Lee
LONDON — Market volatility jumped as traders reacted to growing tensions between the USA and North Korea despite US Defence Secretary James Mattis saying that any conflict between the two nations would be "catastrophic."
The VIX, a measure designed to track stock market fear, has jumped from its lowest level in 24 years to hit a level not seen since April this year, climbing 45% in a single day, marking its eighth largest one-day jump in history.
The chart below illustrates that spike:
Investing.com
"The VIX index struck its most extreme levels since Donald Trump won the US election. In another sign of investors shunning riskier areas of the market, US junk bonds have suffered the worst two-day decline this year," Jasper Lawler, Head of Research at London Capital Group wrote in an email on Friday morning.
As volatility spikes, global markets continue to drop, with an overnight sell-off in Asia extending into Europe during Friday morning trade. All of Europe's major stock indexes are lower after around 40 minutes of trading, with losses peaking at around 1% as of 8.40 a.m. BST (3.40 a.m. ET).
"Love or loathe him, Trump isn’t one to back down from a confrontation so its perhaps not a surprise that things have escalated. North Korea responding with a threat to US territory after Trump warned them not to threaten the US was never going to go down well," Lawler writes.
"We assume markets will move on if it remains purely a war of words but the sell-off looks durable. With earnings season almost over, worry over North Korea may have ignited a well-overdue period of greater market volatility."
Of the continent's biggest indexes, Britain's FTSE 100 is the biggest faller right now, dropping close to 0.9%, as the leaderboard below illustrates:
Speaking on Thursday at his golf club in Bedminster, New Jersey, Mr Trump also offered an olive branch, saying the US would always consider negotiations.
The Republican president said his own statements had not been tough enough on Pyongyang, despite his threat this week to rain "fire and fury" upon the regime.
Pyongyang earlier dismissed the US president's dire warnings as "nonsense".
But Mr Trump doubled down on Thursday, saying: "It's about time someone stood up for the people of our country."
Media captionPresident Trump threatened a response 'like the world has never seen'
Mr Trump railed against previous US administrations for being too weak on North Korea, adding that the tiny dictatorship's pursuit of nuclear weapons was a "tragedy".
He also chided China, saying they could do "a lot more" to intervene on the Korean peninsula.
When asked if there was a possibility of a pre-emptive strike against Pyongyang, Mr Trump said: "We don't talk about that. We never do."
But he said: "I will tell you this, if North Korea does anything in terms of even thinking about attack of anybody that we love or we represent or our allies or us they can be very, very nervous.
"I'll tell you why… because things will happen to them like they never thought possible."
Media captionNorth Korea's second intercontinental missile launched last month was "seen from Japan"
He added: "I will tell you this, North Korea better get their act together or they're gonna be in trouble like few nations have ever been in trouble in this world."
However, there has been no indication that any attack on the Pacific island by North Korea is imminent.
In a message to the public, Guam's Governor Eddie Baza Calvo said there was currently "no threat" to the US territory and the Marianas archipelago, but it was "prepared for any eventuality".
'Scary' situation - BBC's Yogita Limaye in Seoul, South Korea
On the streets of Seoul, barely 50km (30 miles) from the border with North Korea, the latest developments have drawn mixed reactions. Kim Seong-su, 62, said he thought Pyongyang was bluffing to preserve its regime and justify its nuclear programme.
But others are more concerned. Yeon Eui-sook says she finds the situation scary. "I hope everyone can live in peace. Kim Jong-un keeps doing this and making us worry," she said.
Analysts say the language from Pyongyang always gets more aggressive in August, when the US and South Korea conduct joint military exercises. But this time - with a US president who also uses strong words - the confrontation is getting even fiercer than usual.
Mr Trump meanwhile denied there were any mixed messages from his administration.
Earlier this week, US Secretary of State Rex Tillerson played down the rhetoric between the two sides.
Media captionDon't listen to Tillerson - White House
But in an interview with the BBC on Thursday, White House Deputy Assistant Sebastian Gorka dismissed the top diplomat's comments.
"You should listen to the president," he said. "The idea that Secretary Tillerson is going to discuss military matters is simply nonsensical.
Mr Gorka recalled a quote from a Holocaust survivor he often refers to when lecturing on grand strategy, saying: "When a group of people repeatedly says they want to kill you, sooner or later you should take them seriously".
"North Korea has said they wish to annihilate the United States and use nuclear weapons. Sooner or later, somebody should take them seriously," he said.
The tiny but important island of Guam
The 541sq km (209 sq miles) volcanic and coral island in the Pacific between the Philippines and Hawaii.
It is a "non-incorporated" US territory, with a population of about 163,000.
That means people born in Guam are US citizens, have an elected governor and House Representative, but cannot vote for a president in US national elections.
US military bases cover about a quarter of the island. About 6,000 personnel are based there and there are plans to move in thousands more.
It was a key US base in World War Two, and remains a vital staging post for US operations, giving access to potential flashpoints like the South China Sea, the Koreas and the Taiwan Straits.