The Korean threat: what the experts think
Nuclear reaction
“The latest nuclear test conducted by North Korea ensured a cautious start to the week for global markets as haven assets such as the yen, Swiss franc and gold attracted buyers,” said Dave Shellock in the FT. However, the market reaction was “relatively muted”, reflecting “the frequency with which Pyongyang’s actions have grabbed the headlines in recent weeks”. Stock market losses were measured – even in nearby countries such as South Korea and Japan. Seoul’s Kospi slipped by just 0.1% on Tuesday and the Nikkei by 0.6%. “The market does not seem to expect the crisis to escalate into war, and previous escalations have only had short-lived market effects,” said Allan von Mehren of Danske Bank.
Us/china tensions
North Korea’s leader, Kim Jong Un, is showing “an extraordinary level of defiance to the US and a surprising willingness to anger China, the country’s only backer”, said Citywire. But aside from the risk of outright conflict, the biggest concern surrounding this latest move is an escalation of trade tensions between the US and China. Given that the US imported $479bn worth of goods and services from China last year, “we think there is little prospect of President Trump carrying out his threat to ‘stop all trade with any country doing business with North Korea’”, Andrew Kenningham of Capital Economics told the FT. But there are still worries that the US may impose “targeted sanctions” on Chinese companies and individuals doing business there, which “could provoke some retaliation from Beijing”.
Golden haven
One beneficiary of “the North Korea scare” has been the gold price, which spiked to a 12-month high of $1,335 following the test, capping “a nice summer run”, said Dominic Frisby on Moneyweek. com. “So what do we do now? Buy more? Sell? Hold? I reckon that a good $30-$40 of the current price is “war premium” and that “an ongoing standoff out East could cause another $30 surge from here” – particularly if speculative interest grows. Of course, the downside for gold (and the upside for the rest of us) is that “this whole Korean thing could blow over and, with it, this summer’s renewed interest in gold”. Either way, “what happens in Korea defines where we go next”.