Why financial markets aren’t panicking about North Korea


World financial markets don’t seem to be worried about war breaking out on the Korean Peninsula any time soon.

On Tuesday, President Donald Trump said North Korea would feel “fire and fury like the world has never seen” should the hermit kingdom continue to threaten the US. This aggressive tone sparked worries among commentators and geopolitical risk analysts, some of whom warned that this could force a violent response from North Korea and its leader, Kim Jong Un.

Following the news, South Korea’s Kospi index fell 1.1% and its won currency fell 0.9% against the dollar. US stock markets were down less than half of 1% in early trading on Wednesday. These moves aren’t anything out of the ordinary.

Complacency has been a profitable trade for decades

Historically, financial markets haven’t exhibited any extraordinary volatility in response to provocations from North Korea. Market experts point to the country’s very long history of not delivering on its threats.

“For decades, complacency has been the ‘right trade’ when it comes to North Korea,” Goldman Sachs analysts said on Wednesday. “More often than not, market participants have been rewarded for fading negative price moves rather than hedging them. Our sense is that investors have grown comfortable with the view that geopolitical tensions invariably result in diplomatic talks, in which case the right trade is to buy any dips. The result is a market psychology that is relatively resistant to the pricing of geopolitical risk.”

RBA’s Rich Bernstein has been writing about this for months, noting that investors have been ignoring the recent geopolitical posturing while betting on the prospects for the economy.

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