It is difficult to walk back the saber-rattling rhetoric after the US Secretary of State Tillerson tried to diffuse the situation, which had appeared to ease nerves in North America yesterday, notes the analysis team at BBH.
“However, references to the modernization of US nuclear forces, a multi-year project begun last year, spurred a fresh threat by North Korea to fire four intermediate range missiles near Guam in a week's time. This in turn brought fresh condemnation in from Japanese and Korean officials.”
“The net impact is to lift the US dollar, yen, and gold. The geopolitical tensions saw more profit-taking in equities. Debt markets are little changed, but US Treasuries are a little firmer. We suspect that like yesterday, North American participants are likely to unwind some of the anxiety-led price action. Some suspect that the US rhetoric is aimed at putting more pressure on China, but others appear see the US visceral response as part of the current administration's modus operandi.”
“There is a search for historical parallels, and although many suggest the Cuban Missile Crisis, we suggest a more apropos precedent is Iran. Still, some recall Nixon's "madman theory," which is essentially keeping one's adversary off balance by having them think that one is unpredictable and is capable of anything.”
“In any event, South Korea bears the brunt of the adjustment. The Korean won fell nearly 0.6% following yesterday's 0.9% slide. It is the third day this week that the won fell and it is set to extend its down draft for a fourth week. For the better part of the past six months, the dollar has traded between KRW1110 and KRW1160. At the end of July, the greenback tested the lower end of the range. Near KRW1142, the it has approached levels last seen in early July.”
“Part of the pressure stems from foreign investors selling Korean shares. The Kospi fell 0.4% for its third consecutive loss. Its loss this week of about 1.5% is minor. Foreign investors sold about $230 mln of Korean shares today after selling $270 mln yesterday. Still, we note that the Kospi recovered in late dealing that pared its losses by nearly 2/3 before the close.”
“Hong Kong and Taiwan shares fell more than Korea today, losing 1.1% and 1.3% respectively. The MSCI Asia Pacific Index fell a little less than 0.5%, on par with Wednesday's loss as well. It has gained once (Monday) in the past five sessions. European markets are also modestly lower. The Dow Jones Stoxx 600 is off about 0.3%, led by energy and materials. It fell nearly 0.75% yesterday.”
“The debt markets are narrowly mixed. Most European 10-year benchmark yields are a little firmer, and the two-year sector yields edging higher as well, which is producing a minor bearish flattening of the curve. US yields are a fraction softer. Gold reached almost $1280 yesterday, and the attempt to extended the gains today appears to be fizzling in the European morning.”
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