Mutually assured destruction?

Ridhima Sharma
Mutually assured destruction?

Everyone was wrong: the next market crash isn’t going to come about from runaway consumer debt levels, Greece, the collapse of the UK post Brexit or any other economic or financial calamity. It’s going to happen because of rising geopolitical tensions between the USA and North Korea.

This spat was started when the UN increased sanctions against North Korea, which Pyongyang saw as a direct violation against their sovereignty. The increased sanctions were in response to North Korea’s launch of two intercontinental missiles last month.

Like many people, we find this escalation slightly disconcerting but tough rhetoric has always been the ‘dear’ leader’s method in North Korea, whichever member of the Kim dynasty was in charge. Rhetoric isn’t generally a tool used by Washington but with President Trump, who fires from the hip within the Twittersphere, maybe this escalation was slightly predictable.

Fire and fury like the world has never seen
Donald Trump was very critical of Barack Obama when the latter was in office for not supporting his words with action. This was in relation to the use of chemical weapons in Syria: if Bashar al-Assad used these against his own people, then a red line would be crossed, and the US would be compelled to act. Assed duly used these weapons and Barak Obama was labelled as weak by Donald Trump for not following through on his perceived warning.

With that in mind, let’s look at what Donald Trump said: “North Korea best not make any more threats to the US, they will be met with fire and fury like the world has never seen”.

This is the type of language you would expect to hear from North Korea, not the President of the USA. Of course, Pyongyang duly obliged and threatened Guam with Nuclear destruction.

Thankfully Donald Trump has been slightly hypocritical and did not follow-through with his “fire and fury” comments; however, instead of retracting these comments, he came out later in the week and said that perhaps he had not been forceful enough.

It may be summarised that Donald Trump was simply looking to communicate with North Korea in a language that they could understand; hopefully empty threats.

Nearly more than $1trn has been wiped off the global equity markets
Since Donald Trump’s ‘Fire and fury’ speech, nearly $1 trillion has been wiped off the global equity markets. There is the usual flee to less risky assets, such as Gold, the Swiss Franc and the Japanese Yen, when things start turning nasty. The Yen is a surprising asset class to flee to, especially when you see in the news that missile defence systems have been moved into central Tokyo, and that North Korea see Japan as an enemy, albeit one very much closer and very much within range of their missiles.

Of course, there is no way of seeing how this will play out but, like everyone, we hope it will blow over, allowing true diplomacy to prevail. Any further sabre rattling could be potentially dangerous, with neither leader wanting to lose face in front of a watching world.

Nevertheless, the markets opened in positive territory on Monday morning. This may be partly a result of the criticism Donald Trump received over the weekend, after he refrained from actively denouncing far right groups and the riots that ensued in Virginia. While this is hardly good news, anything that that distracts Donald Trump from North Korea has to be seen as welcome news.

Furthermore, over the weekend, senior Secretary of Defence Jim Mattis and Secretary of State Rex Tillerson, wrote in the Wall Street Journal that the Trump administration was continuing to seek diplomatic solutions and that the U.S. has no interest in regime change or accelerated reunification of Korea. This has had the effect of calming the rising geopolitical jousting between Washington and Pongyang, and we hope that this continues.

It’s much easier to pass comment on market movements when it’s based on hard economic data, rather than digest what somebody has written on Twitter. Having said that, we believe sometimes the markets are looking for an excuse for a correction; before this crisis with North Korea, markets were at near all-time highs. All it took was a few tweets to send the markets into a downward spiral, which was always going to be the case but at times like these, when markets are so high, this can sometimes be more pronounced.

Guy Stephens, technical investment director at Rowan Dartington

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