Normally one might expect the annual Labour Day holiday in the United States to be marked by quiet market conditions across the globe, a chance to grab a long weekend perhaps or for the more conscientious, time to mull over what the week has in store. Unfortunately, Kim Jong Un is not being too accommodating on either front.
There are rumours around this morning that the South Koreans have detected preparations for an ICBM launch north of the border. Obviously, after the weekend's apparently successful detonation of a decent-sized hydrogen bomb with a capacity of roughly ten times that of the Hiroshima atomic bomb, news that North Korea is continuing to test methods of delivering it is a little disconcerting. Cue some predictable "Risk Off" market action : stocks lower, gold higher ($1,338, an 11-month high), some buying of Swiss Francs and of course Jap Yen -- notwithstanding geographical proximity (see blog 30/8/17).
US Treasury Bond futures and government bonds generally have shown muted gains, which one could put down to US cash markets being closed today. In truth however, the lack of a bigger reaction across a range of assets is something of a surprise to us. Depending on your point of view, the markets are either displaying admirable reserves of sangfroid, or in expecting things to work themselves out as they always have in the past after periods of sabre-rattling they're guilty of a certain complacency. We would never want to be seen as "nervous ninnies" , but frankly a volatility reading still below 15 on the Kospi 200 S. Korean stock index does not seem particularly high to us in the current circumstances.
Whilst observers will continue to attempt to decipher a recognisable policy from President Trump's contradictory words and actions, not to mention the apparent differences between his stated views and those of his key aides, focus must inevitably settle on China. Assuming Mr Trump holds off from any premature actions, at all kinds of levels China must be a leading player in this drama. It's been a frustration for the much of the global community that China has not reacted more aggressively in terms of sanctions that might deter Kim Jong Un from his chosen course of action.
That's understandable, but China has had a different perspective on things : China has been providing N. Korea with almost all it's oil. and buys almost all of it's exported coal and agricultural products. Any kind of blockade is likely to provoke economic collapse and famine conditions , not to mention bloody regime change -- in short, the recipe to send millions of N. Korean refugees across the Chinese border, something China has been dreading. Worse, the loss of the Chinese lifeline could provoke N. Korea into retaliatory nuclear strikes regardless of the consequences, which would of course include a flood of refugees.
So it's never been quite so straightforward for Beijing as it has been for others ..... and now there's something else to consider : President Trump has threatened to stop all trade with any country doing business with N. Korea -- which of course includes S. Korea and China. Mr Trump may be hoping that the threat may force the S. Koreans to renegotiate a 2012 trade deal with the US that he is threatening to withdraw from, even though his key advisers are urging him against turning his back on the deal. More importantly however in terms of how it would affect world trade and growth, those US politicians from the right both inside and outside of government would surely seize on continuing China / N. Korea trade as the perfect opportunity to start an all out trade war with China ..... should Mr Trump carry out his threat, that is.
To be honest, US threats are losing some credibility in the region and anyway, China is highly unlikely to be cowed by such tactics. But here's the thing ..... not for the first time, Mr Trump might do well to dial back on the rhetoric for a bit -- or to put it more bluntly, to button his lip (yes, we know ..... it's not his way). It's just possible that China will come round of it's own accord pretty soon. In private circles, it's no secret that China's President Xi loathes Kim Jong Un. These latest moves from Pyongyang , entirely contrary to Beijing's wishes and at a time when President Xi is hosting the leaders of Brazil, Russia, India and S. Africa at the latest BRICS conference, are the second time that Kim has embarrassed, some might say humiliated the Chinese leadership.
Mr Xi has shown remarkable patience with Mr Kim -- far too much, some would say -- but the N. Korean leader must be very close to providing the straw that breaks the camel's back ..... and given his nature, it won't be long before he does so. Of course, one could very reasonably argue that Kim no longer cares what either the US or China do ..... which, as scenarios go, would be the most unpredictable and most worrying of the lot.
One more thought beyond Korea :
Every cloud has a silver lining .....
ref :- " US urged to lift debt limit to fund storm aid" , The Financial Times, International section
Note from the editor : "Keep all insinuation of opportunism, and your own cynicism, out of this piece !" ....... So be it, and suffice to say that there may be one beneficial side-effect of the disastrous flooding in Texas and beyond. US Treasury Sec. Steven Mnuchin has urged Congress to ratify a rise in the debt ceiling by Sept 29th, a process that brinkmanship has seemed likely to take to the wire at the very least . Failure to lift the debt ceiling and subsequent damage to US credit ratings, however short-term, would be extremely costly.
Now Mr Mnuchin has linked the passing of the bill to the government's ability to get aid to the victims of the floods, and to start the rebuilding process. It's a pretty good tactic too, and puts those likely to vote against the proposal in a very difficult position. The arch-conservative Freedom Caucus group, Republican by party but no supporters of increases in government spending, want to keep the issues of more general Federal expenditure and flood relief separate. Well they might, but the voting public are not likely to look kindly upon any group who stand in the way of relief efforts.
So the prospects of passing the required legislation through in timely fashion are improved, which will help to soothe the jitters in financial markets. But observers will be watching closely to see how extra money would be applied. The issue of the Mexico Wall has been pushed into the background in the face of Hurricane Harvey, but it's not so long ago that President Trump vowed to shut down the government if he didn't get the funding for it. It's surely not possible that anyone would use the opportunity provided by extra funds for disaster relief to acquire funding for other projects, is it ? (Ooops, there's that cynicism...)