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North Korea tensions spook financial markets

Rising tensions on the Korean peninsula are nothing new, they have been a staple for investors for several years now, but this flare-up has the potential for a policy misstep, more so because of the inexperience of the person occupying the White House, and a tendency to conduct policy by way of tweet and press conference.

This may explain why financial markets have adopted a safety first approach to events over the last twelve hours, as government bonds push higher and the Swiss franc, gold and the yen catch a bid.

Last night’s comments from President Trump that North Korea would face “fire and fury like the world has never seen”, if they continued to threaten the US along with their attempts to build a nuclear warhead, that could hit the western US, brought an entirely predictable counter response from Pyongyang.

The response that the North Korean nation was considering a missile strike on the US base in Guam was the equivalent of a two fingered response to the US President, and there is a danger that this war of words between two leaders with large egos could get out of control.

President Barack Obama found out very quickly how supposed red lines can disappear or become elastic very quickly and it seems that President Trump seems intent on making the same mistakes at a time when he didn’t really need to.

The US had already managed to pull off a coup in getting China to agree to further sanctions on North Korea in the latest UN Security Council resolution, so it surely wouldn’t have hurt to see how this new approach from China may have played out.

What we have now is the prospect of two leaders with big egos pushing the boundaries of rhetoric to the point where one of them will probably have to back down.

Given the unpredictability of the North Korean regime it is difficult to see any compromise coming from there, which means the US may well have to and suffer a further blow to its already tattered credibility.

At any rate financial markets are already taking precautions against an escalation with haven buying happening in the Swiss franc, gold and the Japanese yen, though why anyone would want to buy a currency which is on the front line of a possible conflict is beyond me.

Maybe that’s why Bitcoin is finding its own lease of life as well as a haven of its own in these troubled times.

A currency that has no central bank and no issuing authority and can only be accessed digitally is as likely a candidate for a haven as anywhere else.

Equity markets have behaved as you would expect by selling off sharply, an entirely predictable outcome at any time but more so when volatility levels are as low as they are now which suggests that these moves lower have the potential to gather pace unless the rhetoric gets dialled back.

The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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