Whether the politicians like it or not there is no doubt that the North Korean crisis is beginning to have an impact upon investor sentiment. Markets are starting to wobble, investors are starting to look at safe havens and this is a situation likely to get worse before it gets better. President Trump has not helped the situation with his inflammatory remarks and this war of attrition seems set to continue. So, why are investors really scared?
Uncertainty, uncertainty, uncertainty
As we have mentioned on many occasions, if there is one thing stock markets detest more than anything else, it is uncertainty. If markets are aware of the best-case scenario and the worst-case scenario in a situation these elements can be factored into stock market valuations. If there is uncertainty about the best-case and the worst-case scenario then it is near impossible to reflect these potential risks in stock market valuations. Therefore, more and more investors will bank profits and either sit on the sidelines or look towards safe havens such as gold.
We have seen this before and we will see it many times in the future, investors reaching a certain level when the upside potential is significantly smaller than the downside potential. Quite rightly, many will decide to bank profits and live to fight another day.
Political rhetoric
As we touched on above, the mixed views coming from the White House are not helping stock markets. On one hand we have president Trump tweeting about a potential war while on the other we have requests for further political negotiation. If this is a “clever” move by Donald Trump to muddy the water and confuse the North Korean government it is not working. The previously close relationship between North Korea and China has deteriorated in recent years and in many ways the North Korean government may feel it has “nothing to lose”.
It is also worth noting that sanctions against North Korea have turned the country into a Third World pariah. The government, politicians and business leaders live like kings while the rest of the population are merely used as pawns in a serious game of political poker.
Could this turn into a worldwide crisis?
Yes, is the simple answer. We have the European authorities suggesting that Donald Trump should’ve waited for their support, we have Donald Trump seemingly ready for war and China offering lukewarm support to the USA. The problem is that countries around the world will eventually be forced to support one side or another causing friction, economic upheaval and potentially considerable damage to stock markets around the world. Make no mistake, this North Korean crisis does have the potential to go global and have a monumental impact upon stock markets.
Likely conclusion
Only a few weeks ago the likely conclusion of this North Korean/US friction would have been a political agreement of some kind. This would have reined in use of nuclear weapons by North Korea probably in exchange for the relaxation of sanctions. However, the situation today appears to be very different. The parties seem to be even further apart, North Korea is still poking a stick at the USA and its neighbours and we have the European Union, as ever, many steps behind.
What this will do to stock markets in the short, medium and longer term remains to be seen but this uncertainty is not helpful.