(Newswire.net — August 23, 2017) — North Korea might have succeeded in its efforts to miniaturize a nuclear weapon to fit on an inter-continental missile. The U.S. and its allies naturally distrust Pyongyang and the fact that it could have a nuclear weapon is enough reason to be uncomfortable. To further complicate matters, North Korea has threatened to direct its missiles towards Guam, a U.S. island territory with 163,000 inhabitants.
U.S President Donald Trump doesn’t like being threatened and certainly not by North Korea’s regime. He has said that military action against Pyongyang is “locked and loaded” because “the United States will not tolerate our citizens or our allies being threatened by this rogue regime.”
Following the spate of verbal attacks and threats, investors are starting to consider the possible effects of a nuclear war on the financial markets. This piece looks at how nuclear tensions can actually affect the markets going forward.
1. Volatility returns to the markets
The talks about the possibility of a nuclear war or military action with North Korea have already triggered a bout of volatility in the markets. For instance, the CBOE S&P 500 Volatility Index has spiked 24.08% in the last one month; in contrast, the S&P 500, NASDAQ Composite, and Dow Jones Industrials have been practically flat as seen in the chart below.
2. Contraction in stocks
The second effect of the war mongering on the market is that there’s a capital flight leading to contraction in stock prices. Silvia Doyle, a market strategist at Weiss Finance notes that “investors hate uncertainty and the uncertain nature of wars is causing investors to pull their funds out of stocks and related assets at least until the tensions ease up”. For instance, the S&P 500 and the Dow Jones Industrial average have both recorded two weeks of straight losses this year. The NASDAQ composite has recorded three weeks of straight losses. More so, yields on the 10-year U.S. treasury declined to two-month lows.
3. Gold will post some gains
Gold is a traditional safe haven asset and investors flock into the stability that gold provides in times of market volatility. As expected, the yellow metal is slowing creeping up to winning ways as it booked gains of 2% last week to mark a two-month high. The yellow metal is currently trading around $1,275 an ounce. If the political landscape continues to heat up on the international scene, we can expect the bullish outlook for gold to become stronger. Investors should pay special attention to how China acts/reacts to the war mongering between U.S and North Korea because, when China sneezes, gold tends to catch a cold.
4. Impact on market will be short-lived
Despite the fact that the war mongering between Washington and Pyongyang is causing jitters on Wall Street, market experts believe that the effects of the threats of war on the market will be short-lived. To start with, political strategists believe that the chances of a military action or nuclear strikes are actually low. In fact, it will be suicidal on North Korea’s part to make a move that could trigger military action from the U.S. – and we can mostly deduce that survival is high on the list of North Korea’s regime. Hence, going forward, even though the market is likely to experience an increased dose of volatility going forward, the tensions won’t weigh the markets down for too long.