Thought of the day
09.08 - Fade the “fire and fury”
President Trump raised the stakes in the war of words with North Korea, saying further threats would be met with “fire” and “fury.” His forceful comments pushed the KOSPI down 1.1% and the TOPIX by 1%, while the VIX jumped two points to 12. Given that we would foresee roughly a 15% drop in Asian equities in the event of a US military response and Pyongyang retaliation, these moves may look complacent.
But there are several reasons to suspect that the North Korean situation will not derail global markets:
- President Trump has not yet followed through on his more controversial policy pronouncements – whether on trade sanctions on China, or building a wall on the US southern border. Investors remain unsure of the extent to which his rhetoric is likely to be translated into action.
- Previous episodes of heightened political risk have had only a short-lived impact on markets. During the past five nuclear tests by North Korea, South Korean equities fell by an average of 2.5%, while equities in Asia ex. Japan lost 0.6% within seven days of the tests. The KOSPI is up 16.7% year to date, and has been the top performing Asian market for most of the year. The VIX also reached 12 after Korea’s missile test on 4 July, but subsequently fell back to a record low.
- Economic and company fundamentals around the globe offer a source of comfort, with earnings per share for US and Eurozone firms on track to rise by around 10% for the second quarter.
So while we will keep monitoring the situation carefully, we think that the market reaction so far has not been unfair. We believe that global equities will continue to move higher.