Why are world financial markets being so nonchalant about the North Korea issue?
This is a major geopolitical crisis. Kim Jong-un has fired missiles over Japan. He has threatened strikes on US territories and is now threatening to carry out a hydrogen bomb test over the Pacific.
This follows an unprecedented barrage of insults traded between the US president and North Korea in response to Donald Trump’s threat at the UN to “totally destroy” the country if Washington were compelled to defend itself or its allies. The leader of the free world publicly mocked Kim, calling him “Rocket Man.”
Kim responded, saying he was considering retaliation at the “highest level,” before labeling Trump a “mentally deranged US dotard” who would “pay dearly” for threatening to destroy North Korea.
Stock market panic is missing in action
A high-stakes international drama is unfolding. Yet global financial markets are not responding with the level of panic that might be expected.
There have been slight dips, but the ground is being typically made up quickly. For instance, in spite of the tensions, Japan’s benchmark Nikkei 225 index rose 3.2 per cent last week, taking its gain so far this year to 4.2 per cent.
While it’s true that safe-haven assets are performing better, with the yen and gold rebounding, and US stock futures are looking slightly shakier, the reaction has been decidedly muted.
So why the complacency?
I would suggest that the financial markets know that despite the hype (created by all parties involved) and the escalating tensions, this is not the beginning of world war three.
Regional conflict, although always dangerous and tragic, does not usually have the strength necessary to adversely affect global trading. International commerce is more robust than all the sabre-rattling from the relatively tiny North Korea.
War-related market volatility short-lived
Sure, such tensions create volatility, but this is typically short-lived, even when armed conflict begins. Case in point — the markets were wobbly in the run-up to 1991’s Gulf War but then rose during the fighting. The same happened in the 2003 invasion of Iraq. Stocks also rose during the Balkan conflict in the 1990s, and the Six Day War of 1967 in the Middle East.
Indeed, only world wars have ever created a bear market. Financial markets intuitively seem able to work this kind of thing out — better than politicians — and I trust the markets.
I am not sure what Kim Jong-un’s agenda is, but it is likely seeking to fuel patriotism at home. I am sure we will be seeing more of his attention-seeking “power and strength” displays in the coming months. But the more we see of such displays, the less the stock markets will give a damn.
Markets are becoming accustomed to such antics and are not reacting more fervently. Indeed, I would suggest that they have already priced in this behavior.
So, while some will be calling out the markets for being complacent, I would argue they are being logical and measured.