South Korean Credit Risk Spikes Above China's As Kim Chooses "Path Of No Return"

They think too little geopolitical risk has been priced into the market.

“We still suspect that investors are more concerned than markets reveal,” the Goldman report mused.


“Even though tensions continue to mount and North Korea’s nuclear program continues to advance, it appears markets have yet to see enough evidence that this time is different.”

As The Wall Street Journal notes, so far, markets have shown a muted impact.

“The small size of the moves (on a historic basis) is reflective of the extreme difficulty the market faces in pricing in the ramifications of a nuclear confrontation,” said analysts at Rabobank in a note Friday.


In recent years repeated flareups between the U.S. and North Korea have been resolved, or at least not escalated, and market reactions have reversed relatively quickly.


“For decades, complacency has been the ‘right trade,’ when it comes to North Korea,” said global markets analysts at Goldman Sachs in a note this week. “More often than not, market participants have been rewarded for fading negative price moves rather than hedging them.”


“The market’s view is likely too sanguine in short term,” according to analysts at Citi. “This reflects investors’ experience that geopolitical rhetoric can quieten as quickly as it escalates, and a pervasive belief that the true risk of military confrontation is minimal.”

There are different endgames, with the US simply tolerating North Korea possessing nuclear weapons and moving forward a distinct probability path. Regardless of the outcomes, the markets may be mispricing the situation, particularly if it turns negative.

“Financial markets aren’t good at thinking about geopolitical risks,” the Daiwa report noted. “If this crisis escalates further, markets could well find themselves in a state of shock.”

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