Why the Korea summit is not a big deal for markets

Melody Hahm
Senior Writer
North Korean leader Kim Jong Un, left, prepares to shake hands with South Korean President Moon Jae-in over the military demarcation line at the border village of Panmunjom in Demilitarized Zone Friday, April 27, 2018. (Korea Summit Press Pool via AP)

It was a surreal sight — North Korean leader Kim Jong-un and South Korean President Moon Jae-in met for the first time over the military demarcation line in the DMZ on Friday. With one step, Kim became the first North Korean leader to cross into South Korea since an armistice ended the war between the two countries in 1953.

After many symbolic gestures, the two leaders spent nearly two hours discussing denuclearization and a permanent peace treaty for the peninsula. While the meeting was a historic and surprising development, it had very little impact on global markets.

“South Korea’s equities rose and the won strengthened, but in both cases, by less than 1% compared to the previous day. Markets elsewhere were not affected much either. Given the difficult negotiations that still lie ahead, this is perhaps not surprising. But we suspect that even significant further progress would also do little to lift markets,” says a note from global research firm Capital Economics.

While acknowledging that resolving tensions between the two Koreas would eliminate one of the biggest tail risks to the global economy and markets, analysts point out that the risk wasn’t reflected in market prices from the beginning — for better or for worse.

Last August, President Donald Trump said If North Korea made any more threats to the U.S., “They will be met with fire and fury like the world has never seen.” He also repeatedly referred to Kim as “Little Rocket Man” on Twitter. Still, this escalated rhetoric had very little effect on investor sentiment.

“Even at the height of last year’s crisis, when Donald Trump was threatening North Korea with ‘fire and fury,’ global equities fell by only 2% and more than made up the lost ground within a few weeks,” according to Capital Economics.

Similarly, the potential for a full detente on the Korean peninsula “does nothing to alter our downbeat view of the prospects for risky assets in the next couple of years, which is rooted in our forecasts for the economic fundamentals,” the analysts note.

The real impact on US markets will come from two (or potentially three) more rate hikes from the Federal Reserve. The one-two punch of monetary tightening and fading fiscal stimulus will lead to slower economic growth next year and a weaker U.S. stock market, they said.

Melody Hahm is a senior writer at Yahoo Finance, covering entrepreneurship, technology and real estate. Follow her on Twitter @melodyhahm.

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