Thursday 24 May – So long summit

Summary

The White House gave global markets their latest blindsiding on Thursday afternoon by cancelling a summit planned with North Korea

U.S.-N. Korea relations return to normal

U.S.-North Korea relations have returned to a more recognisable, normality—slowly at first—and then quickly. The frequency of sharp comments emitted from Pyongyang over the last few days intensified overnight, culminating in Vice President Pence being dubbed a “political dummy” at which point the writing ought to have been on the wall. Nonetheless market reaction betrayed surprise. Session lows were seen almost immediately across Wall Street, Frankfurt, London, Treasury yields, whilst spot gold spiked to an eight-session high and benchmark bund yields hit a 4½-month peak.

Buffer removed

Investors have consistently revealed scepticism that the discussions would do much in to reduce brittle relations over the Korean peninsula, and between the North and the U.S. However, that relations had improved sufficiently in recent weeks for all sides to countenance historical talks provided a buffer for risk appetite. With that buffer apparently now removed, we should expect the market to demonstrate a less sanguine attitude to wider geopolitical currents, for instance over faltering discussions in North America and between China. U.S. shares will be the most obvious conduit for weakening sentiment, though in the short term, it is also likely to be reflected via the dollar. The greenback’s current downcycle could change from looking like a routine consolidation into something more severe, particularly with rates across major pairs approaching technical inflection points following a lack of hawkish surprises in Fed meeting minutes overnight.  

With hopes that summit planning could be resurrected looking distant, if not entirely out of the question, a rapid though perhaps fleeting revival of market risk appetite seems off the cards this week.