Effects of the North Korea–US Tension on Investors

In the last two months, tensions between the United and North Korea have continued to escalate, with both sides refusing to back down. North Korea has initiated a series of missile and nuclear tests, worsening tension in the region, and the US president has responded to these tests with strong warnings. Donald Trump’s warnings provoked a strong response from North Korea and unnerved global markets, but only for a very short time. Markets rebounded sharply from their lows after the initial reaction. Could this market behavior mean that investors aren’t worried about rising tensions?

Global financial markets are not immune to geopolitical tensions. History tells us that when such tensions rise, capital flows to safer assets such as US bonds (BND), gold (GLD), and currencies of trade-surplus economies such as Japan (FXY) and Switzerland (FXF). Recent news reports on North Korean tensions had a similar impact on markets, though limited, as these threats were confined to words.

Going ahead, markets will likely remain cognizant of the North Korean tensions. With high valuation, markets (QQQ) are looking for reasons to retract. Even minor disturbances could prompt prolonged reactions, though a lack of escalation in tensions could see investors pouring back into riskier assets. As of now, geopolitical risks seem to be underpriced, though anxiety is likely to persist.