North Korea threats put markets on notice

Overview and Observation; The threat of war emanating from the North Koreans is of grave concern to the public as well as the marketplace. Whether or not the young leader of the North “means what he says” rather than just a response to U.S. military maneuvers in the area remains to be seen. However, on a worst case scenario, history tells us that war takes us out of depressions and recessions. World War II contributed to the end of the Great Depression, but at what cost? Europe was decimated, the first use of a nuclear device was used to finally end it. The cost in human life was horrendous on both sides of the conflict. Yes, war did help us out of depression and of the 25% unemployment but is not the answer if it can be avoided. The increase in demand from Europe for industrial materials and the increase in construction put millions back to work but led to some extent to inflation. The shortage of goods in the U.S. led factories to operate at full strength and put Americans back to work and off the “soup lines.” It would be a “fatal” mistake on the part of North Korea to attack the U.S. interests in the area specifically South Korea, Japan, and the other countries in the area. I doubt very much, as with the Korean War, that China would be on the side of North Korea this time. However, any retaliation by the U.S. for an attack by North Korea would have to be tempered so as not to rile the Chinese and Russians by overt reaction by the U.S. We will have to see what develops but for now global markets are concerned as exemplified by the “flight to the relative safety” of the U.S. equity markets. Now for some actual information to hopefully assist our readers in the development of trading strategies…

Interest Rates: June Treasury bonds closed at 144 13/32nds, down 5/32nds but up nearly 100 basis points from last weeks closing of 143 15/32nds. The move to Treasuries is usually a precursor of anxiety prompted by either economic news or in this case geopolitical concerns. We continue to view Treasuries as in a trading range between 140 and 152. However, should hostilities break out on the Korean peninsula, we could see sporadic wide price changes in Treasuries as well as equities. On Thursday first time unemployment came in at an increase of 16,000 to 357,000 for the week. The U.S. also released the final revision for fourth quarter economic growth at only 0.4% on an annualized basis, below the expected 0.5% forecast by economists. That could continue to provide the impetus for further treasury bond strength and lower yields.

Stock Indices: The Dow Jones industrials closed at 14,578.54, up 52.38 points and a new all time high exceeding that of five years ago. The S&P 500 closed at1,569.19, up 6.34 also establishing a new all time high. The tech heavy Nasdaq however remains 40% lower than it’s all time high closing Friday at 3,267.52, up 11.00. Markets were closed for Good Friday and Thursday’s action was a combination of shortcovering for those of us expecting a market correction and selloff, and position squaring for those concerned over any potential North Korean move over the three day holiday. We remain convinced that the U.S. equity market has gotten way ahead of itself and we are not alone in expecting a sharp correction. Given the magnitude of what could result from a North Korean attack on the South and/or U.S. bases, we prefer the conservative approach for now. The North Korean “kid” leader is boxing himself into a corner with his threats and may have to try to save face somehow regardless of the ramifications to his country and its people. 

Currencies: The June U.S. Dollar Index closed at 83.13 on Friday, down 28.1 points on a pre-weekend position squaring profittaking after the sharp gains from the January lows around 79.80. The dollar was also helped to some extent by the increase in U.S. personal income and the better than expected rise in consumer confidence by the Reuters/Michigan consumer sentiment index. We have favored the dollar for some time and now with the possibility of war on the Korean peninsula, a flight to the safety of the U.S. dollar could continue to provide dollar strength. The currencies gaining on Friday were the euro closing at $1.2826, 44 points, the Swiss franc $1.0542, 46 points, the Japanese yen 0.10629, 27 points, the British pound $1.5190, 68 points and the Canadian dollar 98.26, up 5 ticks. The Aussie dollar lost 29 points to close at $1.0354. The Bank of Cyprus said that depositors with more than €100,000 could lose up to 60% and that did not bode well even as attempts to obtain a $12 billion dollar loan from the EU is conditional on sharp austerity proposals. We see additional problems developing in the Eurozone, so stay with the dollar.

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