Risk-Off Only In Case Of Armed Conflict In North Korea?
A Brief Timeline
- A big nuclear test by North Korea on Sunday, September 3.
- A strong exchange of words between global leaders and threats by the President of the United States on Twitter follows.
Suprised? I was mildly surprised, to be honest. I thought the market reaction would be a lot more severe. Global experts like Adrian Mowat of JPMorgan, however, said the markets would probably be worried only if the pitch of this tension were to escalate to a level of actual armed conflict. All experts we spoke to were of the opinion that the markets will not be worried about trade sanctions, as they do little damage.
Bloomberg data shows that as of 2016, China accounted for over 90 percent of the total trade that all countries did with North Korea.
If Donald Trump were to carry out the threat in his Tweet of stopping all trade with any country doing business with North Korea, China would be on top of that list.
Can the United States then carry out such an act? Most people think it can’t. And I think that’s what the markets think as well. So if a military conflict is an outcome that the markets would not ‘want’ to believe, and trade sanctions of the kind Trump mentioned are acts that the markets ‘don’t’ believe, could there be a major reaction in equity markets? Maybe not.
I personally think that investors are perhaps looking for a reason for equities to correct, and events such as a full-scale conflict, or rate hike talks, or any other such risk-off events are what could lead to some correction. But the liquidity is out there protecting the downside.
The first signs of real tension between U.S. and North Korea came in early August. However, the S&P 500 corrected just 2.5 percent, over a fortnight. The Nifty corrected about 3.4 percent over 4 trading days and then started moving up, albeit in a choppy fashion. And this was despite August being the worst month in terms of foreign portfolio investor flows since November 2016, the month of demonetisation – a net-sell figure of around $2.2 billion. But domestic liquidity came to the rescue. This perhaps shows the resilience of the market, that some form of flows continued despite a hint of adverse news. Yes, FIIs pulled out money, but that happened across the emerging market universe, and the phase was short-lived. Hence, we are back to square one.
I am in the minority camp currently being proven wrong by Mr. Market, in that I believe there could be a case for a risk-off. But then, that is what makes markets what they are - equal and opposite opinion.
Niraj Shah is Markets Editor at BloombergQuint.