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| Kim Jong-un and Donald Trump |
Although
meetings between world leaders are typically not considered market events and
would usually encourage a muted market reaction, this summit risks being viewed
differently. Such a historic meeting between a very unpredictable United States
President and the leader of a nation with nuclear capabilities that has been in
complete isolation for decades represents an event that investors will not be
able to ignore. Assuming that the meeting goes as planned, there are a number
of potential winners and losers from alternative scenarios of the summit ending
positively or negatively. Before diving into these, it is important to provide
an overview of what is likely to be on the meeting agenda.
President
Trump has made no secret of his dislike for nuclear weapons and is expected to
push hard for the ultimate goal, that North Korea proceeds with
denuclearization. In return for giving up its nuclear weapons, it is expected
that international sanctions on North Korea would gradually be relaxed, and the
United States could potentially offer to invest and help build the nation’s
economy.
This
could be enticing to Kim Jong-un, as the future of a more prosperous North
Korea would likely portray him as a hero back home and create a legacy of his
being a leader who took his homeland away from global isolation. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
Kim Jong-un would perhaps seek additional assurances that he would not be
portrayed as a “yes man” for giving up nuclear weapons. References to the
United States applying the so-called “Libyan Model” for disarmament have apparently
caused upset to the North Korean leader back home.
Let’s now take a
look at the potential winners if the meeting goes positively:
North Korea: we are talking about a
nation that has lived in isolation for decades. Those who live in North Korea
are reported to do so in unimaginable living conditions, but that could all
change if the country is pulled out of isolation. The eventual denuclearization
would likely open North Korea to international investment and access into the
market.
Korean Won: the Korean Won has been
lively in the days before the summit. This is potentially as significant for
South Korea as it is for North Korea. It is expected that the Korean Won would
rally as a result of a positive meeting between Trump and Kim Jong-un, mainly because
it increases the likelihood of further improved relations between North and
South Korea.
Donald
Trump: for all of the unpredictable moments that have occurred since Trump
became President of the United States, the news that he would have a summit with
Kim Jong-un is perhaps the most significant. If Trump is able to persuade North
Korea to disarm its nuclear weapons, he would achieve a remarkable feat just
months before the mid-term elections. The USD could even catch a bid and move
higher on optimism that Trump’s foreign policy tactics could encourage world
peace.
Currencies pegged to the
Dollar: the
uncertain nature of US foreign policy and the unpredictable tactics of
President Trump were seen as the main catalyst behind the Dollar dropping so sharply
from its peak shortly after his inauguration in January 2017. If the USD does
receive a bid following the conclusion of the summit, those currencies that are
pegged to the Dollar should be able to jump on the wave. The UAE Dirham, Saudi
and Qatari Riyal and Lebanese Pound are just a few of the pegged currencies
that would benefit from a stronger Dollar.
Stock markets: improved risk appetite
would be seen as encouragement for global stocks. Uncertainty over the past
year or so around Trump - Kim Jong-un relations was seen as one of the major
risks for the financial markets. A reduction of this uncertainty should
encourage investors to carry on investing in global stocks.
Asian emerging market
currencies: the
emerging markets are generally classified as one of the riskier investment
assets out there. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
They would likely benefit from the improved sentiment in the stock markets
enticing investors towards emerging market currencies. Those closest to North
Korea geographically would be the contenders to rally. This includes the Korean
Won, Chinese Yuan, Thai Baht, Indonesian Rupiah, and Malaysian Ringgit. The
Singapore Dollar could also benefit.
High-yielding emerging
market currencies:
higher yielding currencies such as the South African Rand, Mexican Peso and
Russian Ruble are strongly reliant on investor appetite towards taking on risk.
It would be expected that currencies like the Rand would follow the lead from
the global stock markets, if they do rally on indications of a positive summit.
Losers from a positive summit
Gold: the yellow metal has
struggled greatly over the second quarter of 2018 from the unexpected
resurgence in the USD. Buying sentiment for Gold is highly reliant on market
uncertainty and the potential rally in the stock markets, in addition to lower
attraction towards safe haven assets would be seen as negative momentum for
Gold.
Japanese Yen: similar to Gold, the
Japanese Yen relies heavily on its safe-haven status for buying momentum. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
The potential rally in the stock markets following a positive summit and added
risk appetite would consequently be seen as a minus for holding Japanese Yen.
In the
event that the summit does not go well, there are also some potential losers in
the financial markets:
Chinese Yuan: a leading contender for
major loser to a negative outcome in Singapore could unexpectedly be the
Chinese Yuan. It would not surprise if President Trump threatens to introduce
further trade tariffs on China in an attempt to encourage the country to do
more when it comes to influencing North Korea to destroy its nuclear weapons.
China is seen as one of the only allies North Korea has.
Korean Won: in the aftermath of the
breaking development months ago that Donald Trump and Kim Jong-un would meet,
relations between North and South Korea have improved to an extent that some
might have thought unimaginable. If the summit takes a negative turn, it can’t
be ruled out that the Korean Won would sell off on market uncertainty that
North Korea could return to testing nuclear capabilities.
Stock markets / emerging
market currencies / South African Rand:
depending on the extent to which the summit might go down an undesirable path,
there is the likelihood of investors entering a “risk-off” mode if negative
headlines overshadow the meeting. Market uncertainty would be seen as a
negative for global stocks in the event that risk appetite diminishes and would
consequently have a knock-on effect on emerging market currencies. A period of
risk aversion would encourage investors to steer close of high-yielding
currencies like the South African Rand.
When
considering the complexities of Trump and Kim Jong-un getting together, there
are a multitude of ways that the summit could potentially impact the financial
markets. Although President Trump has said himself that he is meeting the North
Korean leader on a “mission of peace” and by that account the summit should
conclude on a positive note, this is still considered as a major risk event for
the financial markets and one investors will need to closely monitor.
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