The recent positive news flow around the proposed North Korea/US summit has caused a number of my clients, believing that events are "moving quickly", to ask me if there are at least cautious grounds for optimism over a potentially market-positve outcome. Personally, I remain cautious. And, certainly, I can see no reason at this stage to alter the probabilities I put against three possible scenarios - if the summit takes place - in my 10 April article.
What I mainly see at present is a good deal of media-related posturing, admittedly in an encouragingly more moderate tone generally than the Kim Jong-un/Donald Trump tit-for-tat insults which characterised 2017, but still remarkably lacking in genuine substance.
First, are we sure that developments on the Korean peninsula are moving quickly? Consider.
- In relative terms, given no progress other than in a negative sense since, let's say, the death of Kim Il-sung in 1994, one can currently talk of developments in a positive sense with some degree of legitimacy. After all, North Korea and the US are in direct dialogue for the first time in over a decade (discounting back-channel contacts) and it does actually look increasingly like the proposed summit will take place.
- On the other hand - and consistent with the view I have expressed in several recent articles that Kim Jong-un is (largely, at least) "calling the shots", I find myself very sympathetic to an editorial in The Weekly Standard which offered the following among its words of caution following CIA chief Mike Pompeo's visit to Pyongyang:
"The immediate effect of these high-level talks will be to embolden Kim [Jong-un]. Negotiations between the US and other world powers always confer legitimacy and prestige on the latter. The Kim regime craves legitimacy and prestige above all else, and by sending one of President Donald Trump’s closest confidantes, the US is giving North Korea what it wants. By agreeing to a meeting between President Trump himself and Kim Jong-un, the US is giving the DPRK even more of what it wants. Kim [Jong-un] will see himself as the dominant partner in the exchange, not the United States."
- Furthermore, I certainly can't get excited about North Korea formally saying it is freezing testing when there has already been a de facto freeze in place since last year. After all, India and Pakistan (in common with North Korea) both carried out around six nuclear tests, as I recall, before the world had to accept them as nuclear powers in 1998; and North Korea has had an advantage over both those countries in that it has been able to acquire much more knowledge without actually testing simply on what's in the public domain. We may still not know for sure if Kim Jong-un does indeed have a thermonuclear device but he certainly has warheads which would wipe out a pretty large city.
- More ICBM tests would be highly desirable from the North Koreans' perspective, I imagine, BUT only necessary if they don't have an alternative means of delivering a nuclear warhead on the US; as they are reportedly able to carry out submarine launches, they should have the capacity, in principle at least, to strike America with shorter range missiles.
The bottom line? I see no reason to get excited about the test freeze headlines which smack to me of North Korean tokenism.
Second, there is the 'no demand for US withdrawal' statement from South Korea. First, we haven't actually heard that direct from the North Koreans. Second, who puts all their cards on the table before a negotiation, especially when Kim Jong-un's principal aims just now may well be getting a summit for prestige reasons and to wrest sanctions relief from the US?
The bottom line? I don't see current softening on US withdrawal from the Korean peninsula as a significant concession either...and especially not as Kim Jong-un has said nothing as yet about giving up his nukes which is, after all, what the US is demanding of him, at least as far as his capability to strike the US per se is concerned. Note that Mr Trump has NOT, in my view, made any clear statement on North Korean nuclear capability as far as South Korea and Japan are concerned; and even if he had should one take him at his word?
Third, financial markets. Investors to whom I am speaking (including for three days in northeast Asia last week) do not appear to be paying any attention to North Korea just now. The focus is pretty much entirely on oil, trade (and the link between the two to judge by more than one headline-driven move in the oil price in the past four weeks or so) and the US yield curve/Fed conundrum. Both these carry significant risk.
The bottom line? Even if the North Korea/US summit produced a rapid 'good' (whatever that means) outcome, it isn't clear that this would boost investor sentiment even regionally given the fact that both Japan and South Korea are major energy importers and Mr Trump's trade grievances against them both (albeit somewhat abated in the case of the latter for now at least).
[Image credit: Nikkei Asian Review]