UBS House View Daily

Thought of the day

04.07 - Pyongyang rattles the cage

North Korea’s apparent inter-continental ballistic missile test has proven successful in provoking President Trump on Twitter. But investors remain pretty much unmoved. The 0.6% decline in the South Korean Kospi Index is unremarkable, and its implied volatility of 12 remains below its long-term average of 15. The reaction in five-year bond yields (+1.5 bps) and the won (flat) was just as muted, and South Korea's CDS spreads, a measure of default risk, are up just 0.01% for the day.

So what would move markets? If Pyongyang threatens the West Coast, the US calculus of risks may shift. Any American military escalation in response would heighten risks for South Korea and Japan, which together account for 8.4% of global GDP and 6.9% of global trade. Markets tend to agree; South Korean credit default swaps climbed 10bps on Trump’s armada bluff last April. Higher table stakes could also lead to a broader trade war between the US and China. For context, almost 20% of Chinese exports (including Hong Kong) go to the US, while China's imports from the US account for about 8.5% of its total imports. Any China-US dispute would also sting US allies Taiwan, South Korea and Malaysia, with 55–70% of their goods sent to China destined for integration into China’s exports.

For now we remain confident in global markets' ability to look through North Korea-related risks, but we will continue to monitor the risk of the crisis escalating, resulting in greater US involvement.

Chart of the day

Pyongyang rattles the cage

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