By James Trescothick, Senior Global Strategist, easyMarkets
The war of words between North Korea and the United States has gripped the markets as of late, with investors increasingly jittery about the prospect of confrontation on the Korean peninsula. However, recent developments seem to suggest that investors have already “priced in” North Korean chaos into their portfolios.
On 15 September, North Korea launched its second missile over Japan in as many months. The rocket flew over the northern island of Hokkaido before landing in the Pacific Ocean. The news triggered an immediate spike in the Japanese yen, a highly liquid safe-haven currency that is used to hedge against geopolitical instability. However, the gains were extremely short-lived, with the yen giving back most of its gains a mere three minutes after the news broke.
The global equity markets shrugged off the act of hostility en route to fresh gains. In fact, the month of September was stellar for global stocks. Even as North Korea upped its rhetoric against the US, Japanese stocks rose more than 3% during the month. In Europe, the Eurozone Stoxx 50 Pr gained 4.4%. Wall Street also finished firmly higher, with the S&P 500 and Nasdaq ending the month at new all-time highs.
Although North Korea still presents a clear and imminent danger, investors appear to be less concerned over a conflict that involves the United States and its regional allies. Whether they are correct is up for debate.
US Secretary of State Rex Tillerson recently said that Washington has direct channels to North Korea, a sign that the White House is seeking a diplomatic solution to Pyongyang’s nuclear program. However, Tillerson’s comments were later rebuked by Trump, who said his colleague was “wasting his time” on North Korea.
“I told Rex Tillerson, our wonderful Secretary of State, that he is wasting his time trying to negotiate with Little Rocket Man,” Trump tweeted on Sunday (“Rocket Man” is the nickname Trump has assigned to Kim Jong-un).
Tillerson is playing good cop with respect to North Korea, perhaps signaling diverging views within the Trump administration about how to contain the hermit state. This suggests that sabre rattling over Pyongyang will continue for the foreseeable future. Rather than overreact, investors appear to be awaiting more tangible evidence of hostilities. Until then, it is business as usual.
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