Over the years the market has learned to look through flare-ups related to North Korea and this may still be the base case, however, the tail risk appears significantly larger this time and there is reason to be cautious and ready for wider fallout, according to Greg Gibbs, Analyst at Amplifying Global FX Capital.
“North Korea is closer to being able to deliver a nuclear bomb via an intercontinental missile; closer to being able to hit the USA.”
“Few people seem to understand the motives of the North Korean leaders. There does not appear to be an alternative agenda in North Korea apart from to improve its weapons technology and to show it is more prepared than the USA to go to the edge and over.”
“There appears to be little reason to negotiate with North Korea, few would expect them to halt their weapons program. The question USA leaders need to face is – are they willing to live with the prospect of NK having the technology to deliver a nuclear weapon to the USA. If not then when is the best time to attempt to force some kind of regime change.”
“US Ambassador to the UN, Nicky Haley said, “The United States is prepared to use the full range of our capabilities to defend ourselves and our allies”, “One of our capabilities lies with our considerable military forces. We will use them, if we must, but we prefer not to have to go in that direction.”
“She said the US was eyeing penalties against “any country that does business with this outlaw regime”.
President Trump said, “I don’t like to talk about what I have planned, but I have some pretty severe things that we’re thinking about,” he said. “That doesn’t mean we’re going to do them.”
“The most obvious way forward at this stage appears to involve increasing pressure on China and other nations to stop trading with NK. It appears that the US see a need for forceful action, and the most immediate threat to global markets is tension between the US and China and other nations that trade with NK.”
“This generates a risk to both the USA and Chinese economies, and given their size and importance, to global growth and investor confidence.”
“While few nations would like to see NK further develop its weapons technology, China and Russia may see NK as a wedge issue that can be used to drive a gap between the USA and its traditional allies, and thus may not be so keen to help the USA tighten the noose around NK. Indeed they have shown ambivalence, calling for calm from both the NK and USA sides, illustrating that they are not siding clearly with the USA.”
“NK itself probably sees the tensions it is creating between China and the USA as useful development, highlighting the weakening position that the USA has in global politics, creating a bigger more complex problem for its main adversary, the USA.”
“As such, we might expect, ongoing tensions in NK, risking a bigger rift between China and the USA, spilling over to trade policies, and generating highly complex and nuanced responses from other major nations like Germany, as they seek closer economic and trading relations with China.”
“The risk is that NK tensions increasingly spill over to trade relations between China and the USA. This poses a significant risk to the economies of South Korea, Taiwan and other Asian nations that are significantly exposed to trade between China and the rest of the world.”
“The capacity of Europe to place itself on the fringe of the NK issue and build stronger economic and political relations with China, makes it appear as a relatively safe place to invest. The more fraught relationship between Germany and the USA since the election of Trump may only increase the prospect that Europe pulls closer to China.”
“The G20 in Hamburg this weekend is an important event where Trump and other leaders will be able to state their positions with respect to NK and pressure each other to support their actions.”