By Mark Melin. Originally published at ValueWalk.
Deutsche Bank’s Macro Economic Strategist Jim Reid and Research Analyst Jeff Cai look at the early reaction to geopolitical events particularly last week, and expect a “pivotal week” to ensure as North Korean bluster said they would be ready for a North Korean Missile attack by the “middle of the month,” which is fast upon us. With markets rushing higher, the North Korean Missile issue might be a case of bluster over substance and fall into a pattern of equity markets recovering after a crisis.
Initial North Korean Missile bluster is ignored by markets Monday
Stock markets around the world were “were obviously in semi tantrum mode over the course of the last seven days,” Reid and Cai wrote in an August 14 letter to investors.
What a turnaround it has been.
Monday of last week the pair who put together the “Early Morning Reid” were suggesting how the “summer lull” was approaching, with weeks of nothing but tranquility on the horizon.
Then US President Donald Trump, Twitter and North Korean leader Kim Jong-un became ensnarled in a provocative tango mid-week. At first, the rhetoric was so provocative and the stakes so high, markets were logically rattled. The S&P 500, for instance, fell from 2474 to 2438 mid-week. But then something happened. The issue was off the radar.
At times, market pricing can proceed fundamental news and is used to gauge sentiment. Such could be the case. After stabilizing Friday amid strong words coming from both sides, Monday stock markets around the world were sprinting higher out of the gate, quickly followed by European and US markets. The S&P 500 was up near 26 points Tuesday, finishing near 2467.
After historic bluster with a nuclear war lying in the balance, Reid and Cai look at this weekend’s events with a degree of calm. Strong rhetoric late last week didn’t impact markets but over the weekend calmer heads prevailed.
CIA Director Mike Pompeo told Fox News that “…I’ve seen no intelligence that would indicate that we’re in (the cusp of a nuclear war) today…” while also indicating that North Korea could test fire another missile. National Security Adviser H. R. McMaster also noted that calmer heads would likely prevail, pouring cold water on the expectation that war will break out.
North Korean Missile threat – Was volatility created from nowhere?
Reid and Cai look at the odd piercing of August tranquility and think the volatility was created from nowhere, influenced by thin trading.
But looking at motivations for engaging in the bluster, the Deutsche Bank analysts think a bit of political gamesmanship might be at play. “The worry that markets might have at the moment is that the Trump administration could be unpredictable relative to his predecessors,” they wrote. “With his popularity low and legislative failures hurting then it’s possible to envisage a scenario where he reacts more aggressively than earlier presidents.”
While the S&P 500 was up near 1% today, gold, a traditional safe haven during times of crisis, was down a stronger 1.84% as President Trump turned his attention from North Korean missile potentials to racial tensions in Virginia, a commonwealth at last check that did not possess nuclear weapons.
Perhaps if the rhetoric between the most proficient military force in the world and North Korean missile threat subsidies, the markets can get back to paying attention to issues that matter, such as the velocity of coming Fed rate hikes.
The macro analysts scratch their heads at lower than anticipated inflation and point to Dallas Fed President Kaplan, who wants to see additional evidence that the inflation bogeyman is in the rear view mirror before the Fed raises rates significantly. “I’m willing to be patient,” he was quoted as saying, while New York Fed President William Dudley indicated one more rate hike might be in the cards for 2017. These are data points that are easy to wrap one’s mind around and are much more pleasant than considering nuclear war options.
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