Does the Tension Between the U.S. and North Korea Affect the Market?

Global equities were calm despite hawkish comments from the Fed and more saber-rattling with North Korea. The US central bank indicated it still expects to raise rates by another 0.25% this year and revealed plans about the pace at which it will deflate its bloated balance sheet. The dollar initially rose on the news but finished about flat for the week.

Weekly Returns:
S&P 500: 2,502 (+0.1%)
FTSE All-World ex-US: (-0.2%)
US 10 Year Treasury Yield: 2.25% (+0.05%)
Gold: $1,297 (-1.8%)
EUR/USD: $1.195 (-0.0%)

Major Events:

    • Monday – Northrup Grumman offered to buy rocket maker Orbital ATK for $7.8 billion as competition for space-related military products heats up.
    • Monday – Google proposed auctioning space to display items for sale on its shopping site.
    • Tuesday – Toys R Us filed for bankruptcy.
    • Wednesday – The Fed indicated it remains on track to raise rates this year and will begin shrinking its balance sheet next month. The dollar rose.
    • Thursday – China lowered its rating on Chinese debt from AA- to A+.
    • Friday – London said Uber was unfit to retain its license but will be able to operate while it appeals.
    • Friday – Senator John McCain said he would vote against the latest effort to repeal the Affordable Care Act, lowering its chances for success.
    • Friday – Facebook abandoned plans to change its share structure to allow Mark Zuckerberg to retain control even while selling shares to fund charitable issues

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Our take:

Tensions between the US and North Korea have turned toward becoming a more personal feud between the leaders of the two countries. Both hurled insults at each other this week and a North Korean representative said the country may detonate a hydrogen bomb over the Pacific. This comes not long after the country threatened to sink Japan, and shot a missile over it in the same week. Sanctions announced Thursday are much more serious than have been in place in the past and will be felt in North Korea.

Markets seem to have grown accustomed to these provocations. Just a few weeks ago any news of escalated tension resulted in an immediate dip in stock prices and a rush to safe havens. But as these mini-corrections proved short-lived investors have learned to ignore the new news. The problem is the tensions are getting worse, not better.

It is concerning. We don’t believe individual investors should try to time markets based around impossible to predict and low probability geopolitical nightmare scenarios. They come up frequently. But it is starting to feel like North Korea will remain a source of volatility for some time to come and the market’s cavalier attitude may be forced to change.

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