Global Markets Rally On North Korea-U.S Peace Talks But For How Long?
Geopolitical tensions had threatened to disrupt world peace and global markets in the Korea peninsula, for the better part of 2017 and early this year. Tensions had reached peak levels in the wake of President, Donald Trump, promising ‘fire and fury that the world had never seen’ in response to North Korea’s continued aggression involving nuclear weapons.
Korea Peninsula Tension Impact
Nobody wanted conflict in the Korean Peninsula to break out, given that it would have pitted two of the world’s most volatile leaders. Prior to North Korea and South Korea holding their first summit in more than a decade, stock markets around the world had started dipping amid rising tensions and bitter exchanges between the U.S and North Korea.
The Dow Jones Industrial Average and the S&P 500 were under pressure early in the year as it emerged that North Korea could build nuclear bombs, small enough, to fit on missiles. Things threatened to get out of hand, as the U.S started assembling warships and submarines in the wake of Kim Jong Un threatening to strike Guam Pacific Island, which holds a U.S military base, with missiles.
The result was investors shunning various assets in the stock markets and financial sector as focus shifted to safe havens of the likes of gold, bonds and the Yen. The dollar also took a hit amidst fears that squabbles in the Korea Peninsula could trigger a nuclear war.
A conflict between the U.S and North Korea is the last thing that investors wanted given that it would have been an expensive endeavor. Prolonged war could have pushed the U.S Federal debt even higher as it currently stands at 75% of GDP.
Declines in the stock market were not only experienced in the U.S but also in Europe and Asia given the interconnection of world markets.
Fast Forward, tensions between old foes have cooled, in a turnaround of events that has caught many people by surprise. North Korea and South Korea have already had their first meeting in more than a decade. The North has also shown commitment to denuclearization as it looks to join the global market after years of seclusion.
The historic meeting between leaders of the North and South gave a boost to geopolitical mood helping propel equities in Europe, Asia and North America higher. Seoul’s KOSPI’s was among the best performing indices as leaders of the North and South shook hands at the border and held talks.
North Korea –U.S Truce Potential Impact on Markets
However, a proposed summit between the U.S and North Korea early next month is what has set things rolling in the markets. Stocks, especially in Asia, have started to tick higher as investors concerns over geopolitical risks continue to ease off.
While there is still some uncertainty about the upcoming summit in Singapore, geopolitical risks in the global markets have significantly reduced. Investors have already started to stream back to the stock and financial markets, as Asian equity markets and some of the major currencies in the region continue to tick higher.
Shares of companies listed in the South Korean capital have already rallied, amidst talk that truce with the North will benefit a number of companies. Market Analysts are especially bullish about investment opportunities for South Korea’s construction sector.
South Korea’s markets are not the only ones ticking as North Korea agrees to come to the table to discuss its nuclear programs and the way forward. An index of the world stocks has already ticked higher after recording one of its best weeks since March.
Easing geopolitical tensions and positive earnings results have seen shares of companies in the U.S, and Europe trade higher as the global economy shows signs of bouncing back after a recent seismic shock.
After global markets recorded their best week since March, it is, becoming clear of what investors should expect on North Korea and South Korea agreeing to a peace deal and opening their borders for trade.
According to a team from Morgan Stanley, talks between the U.S and North Korea and an agreement on denuclearization could see South Korea’s Stock exchange rising by as much as 15%. After the Berlin Wall fell in 1989, the DAX rallied for 2 months and in the process climbed 28%.
“In a scenario where the market believes the Becoming More Engaged or Full Union scenarios look likely to come to fruition in a relatively short period of time, which would entail definitive and genuine progress in the same direction by the key stakeholders, we believe the market could strongly re-rate and possibly overshoot our expectations,” Morgan Stanley team in report.
Cost of Peace
However, there is also a possibility of the equity markets experiencing a sharp pull back on any overreaction. In addition, there is growing concerns that it could cost up to $2 trillion over ten years to maintain peace in North Korea something that could affect the global economy should anything go wrong.
A good chunk of the money would be spent in ensuring North Korea is completely denuclearized and economically viable. North Korea supreme leader is currently in a position to demand a substantial financial commitment for him to let go of his nuclear programs. One option could see the purported $2 trillion split between the U.S, China, Japan and South Korea.
Geopolitical tensions is not the only thing that threatens global markets. Trade wars between the U.S and China is another headwind that could have an adverse impact on markets if caution is not taken.
The U.S imposing higher tariffs for Chinese imports has already triggered a reaction from Beijing, triggering a standoff that experts fear could have a catastrophic impact on the global economy. There are already concerns that the threatened $100 billion in tariffs on Chinese goods could hurt investment portfolios something that could have serious ramifications on the markets.
That said, it appears that easing geopolitical tension in Korea’s Peninsula could have a minor impact on global markets, should trade wars between major economies escalate.