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Another week, another tirade of insults.
US President Donald Trump branded Kim Jong-Un ‘Rocketman’ while Un called Trump a dotard. But while the most important game of insult tennis wages on into a third month, markets could barely be less interested, and this could be the reason why.
Thankfully, this isn’t World War Three. Even if in the worst case scenario is realised and military action is launched in the Korean Peninsula, it’s worth noting that, historically, regional conflicts have had little to no effect on financial markets during their waging. In fact, the only major war in this century in Iraq caused stock markets to rise. Is it different this time?
Maybe — but markets move on probabilities, not possibilities. This week, markets knew this and quickly realised that isn’t the Third World War.
The latest threat from the isolated Korean nation to test an H Bomb in the Pacific Ocean, coming in retaliation to fresh UN sanctions and tough words from President Trump in the UN’s general assembly caused a minor bounce in safe havens such as Gold and the Japanese Yen, and defensive sectors such as Tobacco and Healthcare, but I don’t see anyone panicking.
Furthermore, US equity markets hit multiple records again this week, with the latter notching its 42nd all-time high this year alone. Meanwhile, European markets trade within a whisper of June’s all-time highs – the UK’s UK 100 is just 3.7% from June’s all-time high of 7600 while the German DAX is 2.8% from June’s 12955 highs.
Previously, when US equity markets have thundered forward to a string of fresh record highs, European indices too have followed shortly afterwards. This occurred in December 2016 (November in the US) after Trump’s election victory and in March this year (February highs in the US).
And there are a range of potential drivers on the UK 100 which could inspire a rally back to all-time highs. Although UK Index only a couple of hundred points from all-time highs, shockingly, almost 50% of blue chip stocks are still trading within 10% of 2017 lows.
These names include some of the most heavily weighted stocks on the UK Index , such as Pharmaceutical giants AstraZeneca (AZN) and GlaxoSmithKline (GSK) – the former 11.5% from 2017 highs while the latter is 16% from June highs – alongside banking behemoths Barclays (BARC) and Lloyds (LLOY) – themselves an astonishing 33% and 9% respectively from 2017 highs – and index stalwarts BP (BP.) and BT (BT.A) – 11% and 45% from their highs this year.
Are these stocks going to play catch up and bounce – is now the time to pick these up? Will history repeat itself for indices, with both the UK Index and DAX follow the American markets to new all-time highs as they did earlier this year?
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Avin Nirula, Trader, 22 September 2017
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