Obviously, it’s impossible to know what to make of North Korea’s Fourth of July gift to the United States, given that the information coming from Pyongyang is inherently unreliable.
They launched a missile, but they do that about as often as Elon Musk does, and you can hardly depend on DPRK pronouncements to assess the threat posed by what they claim is an ICBM.
The real wild card, though, is Trump. Washington has been dealing with the regime in Pyongyang for decades, but the world has only been dealing with Trump for six months and as is clearly evident from the tweets he’s sent over the past week, he’s becoming more unhinged virtually by the day.
Additionally, he seems to have lost faith in China’s resolve as it relates to North Korea which makes some kind of unilateral strike all the more likely (plus it would boost his poll numbers, something I’m sure isn’t lost on him).
But if you look out across markets, there’s a sense that the “deer in headlights” dynamic is at play. Remember what we said about that last month:
People often use the “deer in headlights” phenomenon as an analogy for tumultuous markets.
That’s probably a misappropriation.
After all, a deer that’s caught in headlights is anything but erratic. It’s frozen. Unable to react or, more colloquially, unable to get the fuck out of the way.
Here’s David C. Yancy, a deer biologist with the Kentucky Department of Fish and Wildlife Resources to explain why this happens:
- Deer are crepuscular. Their activity peaks within an hour or so on either side of sunrise and sunset, so their vision is optimized for very low light. When a headlight beam strikes eyes that are fully dilated to capture as much light as possible, deer cannot see at all, and they freeze until the eyes can adjust.
- They don’t know what to do, so they do nothing.
Seen in that light (get it?), the current environment, characterized as it is by competing narratives, a manic news cycle, and a fraught geopolitical backdrop, has rendered markets incapable of knowing what to do. So, markets do nothing.
There are too many embedded contingencies in the narrative for market participants to make a truly informed decision. “So, what does one do when no decision can be made?,” Deutsche Bank’s Aleksandar Kocic asked last week. “Well, one waits.” Or, to couch it in deer terms, one “freezes until the eyes can adjust.”
That’s probably how you should view the overnight price action.
Below, find some commentary from analysts that underscores the notion that everyone is in wait-and-see mode…
South Korean assets extend drop after North Korea claimed it fired an intercontinental ballistic missile for the first time. The won weakened 0.3% at the close, the Kospi stock index fell 0.6% and the yield on South Korea’s 10-year sovereign bond rose 4 basis points to 2.28%.
- Bank of Singapore (Sim Moh Siong, currency strategist)
- The won is likely to weaken further and 1,160/USD will be key support level; currency closed at 1,150.70 Tuesday
- “It’s a ratcheting up of the situation that has been simmering for a while. If it’s true that they’ve now developed an ICBM that’s capable of a longer range then it’s a more serious threat”
- “There’s nervousness in the market but whether or not we’ll see panic” will depend on whether there’s further escalation, Sim says. “Investors have a case to be worried but whether the worry will turn into something more serious we need to see what develops on the political front”
- National Australia Bank (Christy Tan, head of markets research in Hong Kong)
- “It’s affecting risk appetite for the equities markets, understandably Japan and Korean equities”
- “The ongoing tension heading into the G20 summit may bring USD/KRW closer to 1,160.”
- “FX responses have been rather muted or not significantly outsized. I think it will be USD supportive”
- Mitsubishi UFJ Kokusai Asset Management (Hideo Shimomura, chief fund manager)
- Tensions on the Korean Peninsula are more intense now than they were earlier this year, although there tends to be a muted market reaction as investors are accustomed to these headlines
- While the risk of a U.S. attack on North Korea is seen as rising, market participants would see it as unlikely at this point
- Sony Financial Holdings (Kumiko Ishikawa, FX analyst)
- “The yen rose slightly as risk-off mood spread after the North Korean announcement, but the impact on the yen was limited”
- The market is unsure on how to react to this, and also we can’t confirm whether or not North Korea has actually succeeded in developing an ICBM. We want to see how President Trump and China react to this”