It’s hard to price a potentially extinction event (at least for much of the Korean peninsula).
That rather amusing bit is from Bluebay Asset Management’s Timothy Ash, and it perhaps helps to explain why markets are having a decidedly difficult time figuring out how to price in nuclear armageddon.
There’s been no shortage of digital ink spilled in these pages and elsewhere over the past 48 hours in an effort to decry traders’ apparent unwillingness to recognize the enormity of the threat emanating from Pyongyang.
But again, this perceived cognitive dissonance may stem partially from the fact that it is simply impossible to price the end of the world.
Nevertheless, the angst in Asian markets was readily apparent on Thursday and as we noted earlier, the Taiex and the Hang Seng had a rough day.
In South Korea, the Kospi fell again and as Bloomberg noted this morning, the nuke scare is really just building on losses that began in earnest on July 28, when shares had their worst day of the year, not because of something Kim said, but rather because equities were responding to a global tech-stock retreat.
Here’s an updated version of the two-pane visual we showed you on Wednesday afternoon when we suggested that the near-term top may indeed be in for South Korean equities:
And there are other signs of nervousness.
The won dropped to its lowest since July 12 today…
… but to really get a sense of the angst, consider that in early Asian trading, USDKRW 1-month risk-reversals rose 0.59vol to 2.62, calls favored over puts – that was the most bullish USDKRW bullish since April 21. Meanwhile, implied vol. rose across the curve with with the 1-mo. gaining 0.54vol to 10.36:
“Dollar-call bids from foreign players, presumably hedge funds, increased massively in the USDKRW option trades,” one dealer at a Korean bank told Bloomberg by phone today, adding that “they’re trying to buy dollar-call bids at any price to hedge the risks.”
Ultimately though, if we’re headed toward a future that looks like it walked out of Cormac McCarthy’s The Road, there’s not much you can do in terms of pricing it in.
Or, as Mark Mobius put it in a May interview with Bloomberg: “there’s nothing you can do about it — if something breaks out, we’re all finished anyway.”