Is there going to be a North Korean nuclear war with America? We hope not and do not think so but here is what the so called experts think. If I have time I would like to write my own piece on this.
Global stocks are sliding in the wake of escalating US North Korean Nuclear War tensions. Upon the recent back and forth threats from North Korean dictator, Kim Jong-un and the United States President, Donald Trump on Wednesday, international indices are down. Conversely, safe haven assets, are up.
Dow futures and S&P 500 futures are down 0.3%, Germany’s DAX and France’s CAC40 dropped 0.7%, and London’s FTSE 100 is down 0.5%. This is not uncommon when geopolitical turmoils arise, but if the threats evolve into physical conflict, US debt levels could spike exponentially and global supply chains will be severely affected.
While traditional markets fall victim to political tensions, safe haven assets like gold, the Swiss franc, and cryptocurrency soar. Crypto is at record highs today, pushing past $120 billion USD. Yesterday, Bitcoin hit an all-time high of $3,500 USD and popular tokens like Ethereum, Litecoin and Dash are up as well.
While macro risks to KRW have receded, there is still the tail-risk from any over a North Korean Nuclear War, as price action in recent sessions has shown. But that is unlikely to price in markets until investors see enough evidence that this time is different than previous episodes of tension.
Many of the main targets in South Korea are located close to the border with the North. The capital, Seoul, which accounts for roughly a fifth of the country’s population and economy, is located just 35 miles from the border (see Map 1 on next page), and would be a prime target. The capital region as a whole, which includes two other districts neighbouring Seoul, accounts for slightly more than 10% of the country’s land area but roughly half the country’s population and economy. Even a relatively short conflict would deal catastrophic damage to South Korea’s economy.
As the world’s ninth largest economy, accounting for around 2% of global GDP, South Korea is bigger than any other country that has experienced a military conflict on its own soil in the last 70 years. A 50% fall in the value of South Korea’s GDP would directly knock one percentage point from global GDP.
The US spent around US$170bn on reconstruction after the most recent wars in Afghanistan and Iraq. South Korea’s economy is roughly 30 times larger than these two economies combined. If the US were to spend proportionally the same amount on reconstruction in Korea as it did in Iraq and Afghanistan, it would add another 30% of GDP to its national debt. Doing the math 30 times would be $5 trillion dollars.
Fire and fury aint cheap!
Amid rising geopolitical risk, Asian equity markets sold off overnight. The regional MSCI Asia Pacific index declined 0.4%. Looking at individual markets, the Nikkei plunged 1.3%, the Korean Kospi slid 1.1%, the Hang Seng decreased 0.4%, the Indian Sensex fell 0.7% and the Shanghai Composite index dropped 0.2%.
Data from Ihor Dusaniwsky, Research head, financial analytics firm, S3 Partners, shows:
Although most South Korean equity short exposure is derived from trading swap contracts there is still enough active outright short selling to gain insight into which Korean stocks are the most popular short positions.
We track $10.2 billion of outright and swap based Korean short positions and here are the most shorted Korean stocks and sectors.
So at least the markets are not showing too much fear of a potential North Korean Nuclear War.
Staying with Trump, an earlier article by the Washington post suggested North Korea’s nuclear capabilities may be more advanced than prior expectations. According to US intelligence reports the state: i) can now produce small nuclear warheads that fit inside its missiles, ii) is outpacing expectations in building missiles that are capable of striking the US mainland, and that iii) the state may have up to 60 nuke warheads, this compares to ~7,000 each in US / Russia, 260 in China and 215 in the UK. These reports coupled with increased rhetoric from Pyongyang and a flat refusal to negotiate on their nuclear program may have added to Trump’s fury. Senator McCain said Trump needs to be more cautious in his statements because he may not be able to make good on the implied threats.
For now, we watch and wait.