North Korean acts become like `Boy Who Cried Wolf' for markets

Traders are getting less excited by North Korean provocations, judging by the diminished reactions in financial markets to the dictatorship’s weapons tests.

Consider the yen. A highly liquid instrument, it’s a haven in times of geopolitical or global financial stress so is perhaps the most sensitive asset to look at for immediate reaction to North Korean acts. The currency soared as much as 0.6 percent against the dollar within about a minute on Friday morning after the news Pyongyang had launched another missile toward Japan. Yet within another three minutes, two thirds of the advance had evaporated. Hours later, it’s barely changed from its New York closing level.

 

(Yonhap)

There was  more lasting impact from the North Korean nuclear test on Sunday, Sept. 3, which was its most powerful to date. When markets opened that Monday, the yen immediately jumped 0.9 percent. By the close in New York, it was up 0.5 percent, surrendering some of that initial advance. The currency went on to gain further that week as Hurricane Irma threatened major damage to Florida.

Taking a broader look, the gains for haven assets so far on Friday are well short of the reactions on Aug. 29, when North Korea launched an intercontinental ballistic missile over Japan. And they pale in comparison to the surges seen a week ago when traders were fearful that the weekend would bring missile tests, and that Florida would suffer much more damage than it did from Irma.

“Markets won’t like it, but I don’t think it’s necessarily the precursor to a sustained market pullback,” James Soutter, a portfolio manager at K2 Asset Management in Melbourne, said about Friday’s missile launch.

Mark Mobius, the veteran emerging-market investor who is executive chairman at Templeton Emerging Markets Group, in May put the North Korea threat in these terms: “there’s nothing you can do about it -- if something breaks out, we’re all finished anyway.”

The implication of that analysis is that some sort of actual conflict, such as a US shoot-down of a North Korean missile, might be needed to trigger a sustained impact on markets. (Bloomberg)