South Korean Credit Risk Spikes Above China's As Kim Chooses "Path Of No Return"
For the first time in four years, the credit market sees more risk of a South Korean sovereign default/devaluation than China.
After months of hit money flows in EM stocks sending KOSPI to record highs in the face of rising nuclear tensions with its neighbor, this week saw investors crack as Daiwa analysts warned "Kim looks to have chosen a path of no return."
As a North Korea war potential approaches, with the regime said to have attack ready nuclear missiles, Daiwa analysts Kevin Lai and Olivia Xai note the awkward position the US military and diplomatic corps finds itself.
“It seems the US has miscalculated the possibility and time needed for North Korea to make a program deliverable,” they wrote, and there is a sense the point of no return is passing.
“The window for the US to ‘denuclearise’ the North has almost shut.”
Escalating tensions over North Korea have also sent the dollar surging against the won to test a critical downtrend line resistance in a triangle formation.
The situation looks tenuous, Daiwa notes:
By making such a promise, Kim looks to have chosen a path of no return. If he delivers the plan, the US will almost certainly respond aggressively with a range of military options — and the situation will escalate to a major military conflict involving several more parties, including South Korea and Japan. There would be little room for either side to step back. If Kim doesn’t deliver, he risks creating a political crisis for himself and permanently weakening his regime. He is now in a position similar to the one Saddam Hussein was in before Desert Storm. His primary goal is regime survival. Giving up nuclear weapons would mean abandoning that goal; bending to US pressure would leave him politically vulnerable at home.
While a nuclear war appears a distinct possibility, stock markets are acting rather benign.
“Korean assets have seen a modest ‘risk off’ over the past two weeks, but this most likely reflects a modest cooling in global growth data,” observed Goldman Sachs analysts Charles Himmelberg, Goohoon Kwon and James Weldon in an August 9 report.
The South Korean KOSPI stock exchange, while trading lower since July 24, remains near all-time highs.