How portfolios could be affected by the U.S.-North Korea rhetoric
The alarming back-and-forth between the White House and North Korea cast a shadow over the markets Wednesday, after U.S. President Donald Trump warned the East Asian capital Pyongyang of “fire and fury like the world has never seen.”
Here’s how the situation could be affecting portfolios today: Asian stocks Japanese and South Korean companies saw stocks sway as their neighbour traded threats with Trump.
The KOSPI Index — a measure of the South Korean stock market — was down 1.1 per cent as of Wednesday morning.
Samsung Electronics Co. Ltd. shares shed 3.02 per cent of their value, Korea Electric Power Corp. fell 0.9 per cent and LG Electronics Inc. was down 0.28 per cent. Not all Korean stocks took a hit, however, with Hyundai Motor Co. up 1.39 per cent.
In Japan, the Nikkei 225 was down 1.29 per cent. Mitsubishi Corp. stock fell 0.41 per cent, and Toyota Motor Corp. slid 1.58 per cent.
But the fluctuations spread beyond Asia, according to Cristian Maggio, head of emerging markets strategy at TD Securities in London. Maggio wrote in a research note on Wednesday that “Asia’s risk-off session extended to Europe on the heels of soft factors and the belligerent rhetoric by U.S. President Trump challenging North Korea.”
“Stocks are in deep red both in Asia and Europe, with Nikkei and Swiss/French bourses the respective regional underperformers (approx. 1.3-1.4 per cent negative),” he added. The loonie The Canadian dollar continued to lose ground against U.S. greenback on Wednesday morning, as investors sought to shelter their money in traditionally secure places — such as the American currency.
Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank, wrote in a report that Trump’s comments had “overshadowed” other developments. Meanwhile, Holt noted that “safe havens like the Swiss franc, Japanese yen and USD are appreciating versus the euro, CAD, A$, peso and others.”
Since the Canadian dollar cracked 80 cents U.S. late in July, it has been on a slow decline. The loonie lost another 0.33 per cent in value as of 11:02 a.m. on Wednesday, falling to $0.787 US, according to Bloomberg.
Mark McCormick, North American head of FX strategy for TD Securities, wrote in a note that the geopolitical drama was “boosting demand” for those safer landing spots.
Moreover, McCormick added “technical momentum is turning against CAD, increasing our confidence that we will soon see a break of 1.27; CAD data surprises are losing momentum and positioning in CAD looks stretched.” Sovereign debt In times of crisis, investors often flock to the security of sovereign debt, and that means Ottawa’s latest two-year Government of Canada bond auction, scheduled for Wednesday, is particularly well-timed.
“How very fortuitous to hold an auction on the back of Trump’s ‘fire and fury’ remarks that have raised global demand for sovereign debt and which should benefit demand into the auction,” wrote Holt.
But Holt also suggested the markets might be used to the bluster of the current administrations in Washington and Pyongyang.
“Put simply, markets have strong cause to discount comments from both Trump and (North Korean leader) Kim (Jong-un) in a perverse credibility contest without losing all faith in Congress,” he wrote.
Holt said that sovereign debt markets “are rallying on geopolitical risks,” with U.S. Treasury yields down from Tuesday.
However, Canadian government debt was “underperforming the rally in Treasuries especially at the frontend.”