The Day So Far…
“North Korea best not make any more threats to the United States . . . they will be met by fire, fury and, frankly, power the likes of which this world has never seen before” – US President Donald Trump, 8th August 2017.
Not since Harry Truman spoke shortly after dropping the first nuclear bomb on Hiroshima in 1945 has such forceful rhetoric been adopted by a US President. The escalation in this verbal approach has provided a moderate flight-to-quality bid across assets overnight with latest reports suggesting that North Korea’s military is now “examining the operational plan” to strike areas around the US territory of Guam with medium to long-range missiles, according to their state-run news agency KCNA.
The big question then is where do we go from here? and to me the comments out of other senior politicians on Capitol Hill have been telling, with one of the most interesting coming from the Republican Chairman of the Senate Armed Service Committee – John McCain. The Arizona senator said last night that “it’s classic Trump in that he overstates things”, adding that “Trump needs to be more cautious in his statements because he may not be able to make good on the implied threats”. This hardly sounds like robust backing for such vehement aggression and with a risk of provoking a potential pre-emptive strike from North Korea I do not see this reaching military confrontation any time soon. What will need to be monitored in the meantime is commentary from other major heads of state with particular interest in China’s assessment of the situation.
The Day Ahead…
It’s another quiet day on the docket which may prompt the markets to dwell on the developments in the Korean Peninsula. In context, it’s worth keeping in mind that despite the world seemingly on the precipice of nuclear war the Dow finished down just 0.15% yesterday, and despite a move higher in the VIX it closed below 11, still well below levels seen around the first round of the French election and amid the uncertainty surrounding the legitimacy of Trump’s Presidency itself.
Given US participants saw Trump’s comments yesterday I think a large part of the latest news has been priced in and in the absence of any new information we may return to the more quiet conditions we observed on Monday.