It hardly seems much of a contest: the world’s most powerful nation both economically and militarily vs. one of the poorest nations on earth but with a strong, or at least large, military. So far, the war has been rhetorical as both sides though their respective leaders hurl superlatives at each other that usually end in one of them being engulfed in a ring of fire. The words, however, have unnerved global markets.
This past week saw upwards of $1 trillion shaved from global stock markets triggered by Donald Trump’s and Kim Jong Un’s ongoing war of words. The last word has so far gone to Donald Trump who did his usual tweet, asserting that ‘military solutions are now in place, locked and loaded, should North Korea act unwisely.’ Earlier, North Korea had threatened to land a missile near the US Pacific territory of Guam in response to Trump’s promise to unleash ‘fire and fury.’ The world can only shudder at the thought of a nuclear exchange. But words are having an impact as stock markets ‘hurled’ and safe havens of Japanese Yen, Swiss Francs, US Treasuries, and German Bunds and gold jumped higher.
US and global stock markets had been hurtling ever higher and valuations are near record. A correction was most likely overdue. The war of words and tensions over North Korea was the trigger. How deep the correction goes is anybody’s guess at the moment. Numerous pundits believe that the odds of actual war between the verbal combatants is low, but that a correction was probably overdue and this could result in a buying opportunity.
The likelihood is that the rhetoric and war of words is liable to continue for some time. Even if North Korea were to launch more missiles into the sea, it most likely would up the ante and rattle markets further. An overvalued market and sabre rattling is a recipe for the correction. Inflation numbers released this past week were benign. As a result, the combination of the sabre rattling and a stumbling market could keep the Fed on the sidelines through the rest of the year. And that is not even getting into the looming fight over the budget, tax reform and the debt ceiling. Also, let’s not forget the ongoing investigation into the Trump campaign and the Russians being conducted by special counsel Robert Mueller.
This post was published at GoldSeek on 13 August 2017.