Geopolitical Risk Rises As North Korea & US Escalate Tension.

August 11, 2017
Kim Jong Un and President Trump continue to trade barbs. Photo: Reuters

Kim Jong Un and President Trump continue to trade barbs. Photo: Reuters

For the first time in a long time, genuine geo-political risk has caught the markets attention. North Korea and the USA are currently engaged in a high-risk game of chicken, with neither country taking a backwards step in the escalating war of words.

Geo-political risk and the markets.

As it’s been a while since we’ve seen an event like this, I’ve had to fire up some old synapses in the brain and attempt to put this picture together. Most risk-off events see money flow to what are perceived as “safe” assets. In this case, we’ve seen some flows into the Yen, as well as into bonds and precious metals. Gold has seen a nice pop. Equities have seen a little move down.

I heard a very interesting comment today on CNBC, and I’m paraphrasing here:

Sometimes the actual event doesn’t really matter, the market has almost been looking for an excuse to move lower, and this is the excuse of the moment.

That makes a lot of sense to me. The market has been coasting on autopilot, and a little bit of a shake-up is necessary. Down days are healthy.

The weirdest thing about today was that the S&P500 was down only -1.45%, the Dow -0.93%, Nasdaq -2.13% and the DAX -1.13%. Those aren’t huge numbers at all…yet the VIX moved up over 40%. As I talked about earlier this week, the potential for a VIX rally was massive, and we are starting to see that come to fruition. There’s still a lot more room for it to go, and strong words from President Trump will add fuel to that flame.

Perhaps the most interesting thing about today, and this whole “event”, is that the markets have hardly fallen…yet I’m sitting here writing about it like it’s something special. The only thing that makes a 1-2% down day special is that it rarely happens anymore.

If I was to go off the last 8 years of market history, I’d be looking for an opportunity to get long equities once this situation sorts itself out. The perma-bears will argue otherwise, but it’s hard to ignore the S&P daily chart.