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North Korea: A macroeconomic event that they actually care about

Finally, markets seem to have found a macroeconomic event that they actually care about. Apparently, all-out nuclear war is a worry, in a way that, say, the election of Donald Trump or Brexit, are not.

  • After ignoring macroeconomic risks for some time, North Korea is finally getting markets concerned
  • Any sell off in risk assets has been short-lived as buyers have flocked back
  • However, it is difficult to see how markets make progress from here

Why has the North Korea problem struck a chord? The answer seems obvious – after all, it’s going to be mightily difficult for companies and economies to thrive amid a North Korea/US show-down; even if, in the event of a nuclear war, stock markets would probably be the last thing anyone would worry about.

The problem, it seems, is less what it would do to North Korea, which would probably be swiftly dealt with, but what it might do to the rest of the region. Would there be a migrant crisis, for example, akin to the Syrian crisis that proved so destabilising in Europe? Could South Korea cope with the thousands of migrants tumbling over the border?

Once again, people appear to be putting their faith in Donald Trump as a dealmaker and businessman. Some have suggested he is using the threat of nuclear war in North Korea as a bargaining chip with China, which may ultimately see China take greater control over the unstable country. It is difficult to find significant evidence of a coherent plan in Trump’s actions, but may be we are not seeing the full picture.

“There are thousands of active managers sitting on the sidelines scouting for bargains.”

In the meantime, markets are vacillating. Gold is rising, the Dollar is falling and the Euro appears to be becoming the new powerhouse currency. For the time being, when markets sell off, there seems to be plenty of bargain-hunters ready to swoop in. This suggests sentiment towards equities isn’t so bad in spite of mounting geopolitical tensions.

It also, as ever, suggests a lack of any other options. With no meaningful change in monetary policy in sight for most major economies, cash can only be a temporary measure. There are thousands of active managers sitting on the sidelines scouting for bargains. This is a powerful support for the markets as it stands.

With this in mind, it is difficult to be very pessimistic about global stock markets. That said, it is also difficult to see what propels them further from here. Higher earnings? Higher economic growth? A material change in sentiment? Far from a riot, I predict it will be pretty dull from here.


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