The Daily Prophet: North Korea Proves Adept at Market Timing

Connecting the dots in global markets.

Whether intentional or not, North Korea’s latest salvo in the war of words with President Donald Trump was especially worrisome, at least from the standpoint of markets. It is if traders suddenly woke up to the risks, however remote, of nuclear combat. Yes, tensions have been rising for months and markets moved on each time, but Monday was different because Pyongyang chose do some saber-rattling during U.S. trading hours rather than the dead of night otherwise known as Asian trading hours.

But that’s not all. Foreign Minister Ri Yong Ho’s assertion that North Korea can shoot down U.S. warplanes in international airspace as part of its right to self-defense under the United Nations charter came amid a dearth of economic news that would normally influence trading. Add to that the notion that traders are generally complacent when it comes to the various risks facing markets -- whether it be sky-high valuations for everything from stocks to bonds or central banks pulling away their punch bowls -- and the table was set for a meaningful flight from anything deemed risky.

As such, the big losers on the day were stocks, emerging markets and junk bonds, while Treasuries, gold, the yen and Swiss franc led the winners. At one point, the S&P 500 Index was suffering its worst one-day decline since Sept. 5. “The market had plenty to drive the flight-to-quality price action that persisted throughout the session,” the fixed-income strategists at BMO Capital Markets wrote in a research note. 

Days like Monday help explain why the debate over whether low levels of volatility are a sign of complacency is a bit misguided. Although current volatility is depressed as measured by the CBOE Volatility Index, or VIX, traders don’t expect it to stay that way. That can be seen in the CBOE VVIX Index, which is the implied volatility of the VIX. The ratio between the two gauges just reached a new high, according to Bloomberg News’s Cecile Vannucci. Since the last peak on Aug. 9, the VIX posted moves of more than 20 percent on four separate days, including a 44 percent surge on Aug. 10. At the same time, exchange-traded products that benefit from market calm just had their biggest weekly outflows on record, while those that gain with greater stock swings gathered more money. Then again, just because volatility is rising doesn’t mean stocks are doomed. In a note to clients Monday, Cumberland Advisors said that when comparing one-year returns for the S&P 500 Index using a randomly selected date to one-year returns after the VIX drops to a 52-week low, they find no statistical significance between the two returns. 

Political risk is back in play with the euro. The Bloomberg Euro Index fell the most since March after German elections showed the populist right-wing Alternative for Germany party winning more power than expected at the expense of Chancellor Angela Merkel’s Christian Democratic Union-led bloc. After surging as much as 9.8 percent between mid-April and the end of July as political risks eased and the euro zone’s economy gained strength, the Bloomberg Euro Index has largely been little changed since early August. That has left many strategists wondering whether the euro has gotten too expensive with the next move being lower. If the currency is able to hold at these levels, however, the bears could be disappointed. “It’s now or never for a euro correction,” Kit Juckes, a London-based strategist at Societe Generale, wrote in a research note Monday. Juckes added that he’s closely watching the euro against the Swedish krona, Norwegian krone and Polish zloty for clues as to where the currency is headed next.  

Brent crude surged to its highest in more than two years as Turkey threatened to shut down Kurdish oil shipments through its territory. Futures climbed as much as 3 percent in London, and the U.S. benchmark reached a four-month high, according to Bloomberg News’s Jessica Summers. Turkey can choose to “close the valves” on oil exports from Kurdistan, Turkish President Recep Tayyip Erdogan said as the Iraqi region holds an independence referendum. Meanwhile, OPEC and its partners implemented more than 100 percent of their agreed-upon cuts last month, and the outlook for global demand has improved. “It’s pretty clear the Kurds are going to vote for independence and we will have yet another geopolitical hot spot in the Middle East that threatens a significant amount of oil supply,” said John Kilduff, a partner at hedge fund Again Capital LLC. At the same time, “the cooperation and the strong effort by OPEC is registering with the market.” Crude has risen more than 9 percent this month in New York, as U.S. refiners recovered from Hurricane Harvey and both OPEC and the International Energy Agency sweetened their worldwide demand forecasts.

Chinese property stocks plunged in Hong Kong after a raft of mainland cities added housing curbs, surprising investors betting that the government’s next step would be to ease restrictions, according to Bloomberg News. Eight cities including Chongqing and Nanning rolled out curbs over the weekend, with most banning home resales within two to three years of purchase, the official Xinhua News Agency reported. Shanghai-based Tospur Real Estate Consulting Co. said six more may follow suit, without naming them. A Bloomberg Intelligence index of 22 developers tumbled 9.1 percent on Monday, the biggest decline in six years, taking the air out of some valuations for stock market stars such as China Evergrande Group and Sunac China Holdings, which have climbed fivefold and fourfold this year. The industry is a focus of policy makers ahead of a twice-a-decade Communist Party congress slated to begin Oct. 18, as leaders try to cool prices without tanking the economy.

U.S. housing data hasn’t been good lately. In fact, it’s been so worrisome that the National Association of Realtors just undertook a survey to figure out whether the slump is just a pause or is something dire. Probably not surprising, the group found that most respondents say it’s a good time to buy a home and about the only thing preventing them from doing so is a dearth of inventory. Economists will find out Tuesday whether the malaise extended in August as the Commerce Department releases its monthly new home sales data. The median estimate is for a small rise of 2.5 percent following the big 9.4 percent drop in July. Sales in the South are likely to be disrupted by Hurricane Harvey at the end of August, according to the economists at Bloomberg Intelligence.

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