Following the sudden and surprising death of North Korea's "Dear Leader", many are wondering what this means for risk, especially in the Pacific rim. In other words, was last night's selloff warranted? For what it's worth, here is Goldman's Goohoon Kwon with a take of how the institutional audience is trying to comfort itself that all shall be well, and that power vacuums are all inherently rational and perfectly predictable. Just ask Egypt. And Robespierre.
Bloomberg analyst TJ Marta summarizes market developments in the last few hours since the death of Kim Jong Il pushed risk aversion, especially in Asia to an extreme, while Bloomberg's James Holloway explains why market sentiment is where it is, and what the market will be looking for today.
Just out on Yonhap:
- North Korea says its leader Kim Jong-il has died.
- N. Korean leader died of fatigue at 8:30 a.m. Dec. 17 during train ride: KCNA
And Reuters confirms:
- NORTH KOREA STATE TELEVISION SAYS KIM JONG IL HAS DIED
Great. More geopolitical uncertainty. Because as the Arab Spring has shown us there is nothing quite as stable as a transitory military government to fill a power vacuum (also see Thermidorian reaction during the French Revolution).
As expected the South Korean response is immediate.
- S. Korean gov't shifts to emergency footing on news of N.K. leader's death
Russia Retaliates Against US: Puts Radar Station On Combat Alert, Prepares To Take Out European Missile Defense SystemsSubmitted by Tyler Durden on 11/23/2011 22:50 -0500
Earlier today, we presented the latest developments in the escalating possibility of an imminent air (and potentially land) campaign targeting Syria by the "western world", a move that would infuriate not only Iran, but also Russia and China, both of which have made it clear they would not sit idly by and let such an "aggression" stand. Now it is Russia's turn to retaliate. Cutting straight to the chase - in a nationally televized appearance by Russian president Dmitry Medvedev: in response to what the Russian believes is an active incursion and a potential act of eventual aggression on behalf of NATO countries in Eastern Europe (and hence the US), he he said the following (7 minutes in): "First, I am instructing the Defense Ministry to immediately put the missile attack early warning radar station in Kaliningrad on combat alert. Second, protective cover of Russia's strategic nuclear weapons, will be reinforced as a priority measure under the programme to develop out air and space defenses. Third, the new strategic ballistic missiles commissioned by the Strategic Missile Forces and the Navy will be equipped with advanced missile defense penetration systems and new highly-effective warheads. Fourth, I have instructed the Armed Forces to draw up measures for disabling missile defense system data and guidance systems if need be... Fifth, if the above measures prove insufficient, the Russian Federation will deploy modern offensive weapon systems in the west and south of the country, ensuring our ability to take out any part of the US missile defense system, in Europe. One step in this process will be to deploy Iskander missiles in Kaliningrad Region"
Federal Reserve Chairman Ben Bernanke is taking his show on the road.
- Political and debt concerns pertaining to Italy remained the main focus in the market today. News that the Italian PM Berlusconi may resign soon strengthened appetite for risk, however the news was later denied by Berlusconi
- ECB's Mersch said that the ECB constantly discusses the possibility of ending bond-buys if Italy does not meet reform pledges
- Market talk of the ECB buying the Italian government debt helped the Italian/German 10-year government bond yield spread to come off its widest levels
- CHF came under pressure across the board following dovish comments from SNB's Hildebrand allied with an unexpected decline in the Swiss CPI data
- Chinese vice finance minister said details on the expansion of the European bailout fund is still unclear, adding that purchases of EFSF bonds are not on the G20 agenda. Also, EFSF’s Regling said he does not expect to reach a conclusive deal with Chinese leaders during his visit to Beijing
- The German Constitutional Court halted the use of a special parliamentary committee that was recently created to decide on changes to the Eurozone’s bailout fund in emergency situations
- Meanwhile, a German senior coalition lawmaker said the Constitutional Court's decision means the EFSF secondary market bond purchases will be de facto impossible until a verdict, as Bundestag plenary cannot meet confidentially
- Lacklustre BTAN auctions from Italy dented appetite for risk
- The FOMC decided to implement “Operation Twist”, however provided a downbeat assessment of the US economy yesterday, and warned of “significant” downside risks to the economic outlook
- Manufacturing PMI reports from China and the Eurozone came out worse than expected
- According to an article in the FT, BNP Paribas is in talks with Qatar to secure investment. However, the report was later denied by co.’s CEO
- The USD-Index traded higher amid risk-averse trade, which in turn weighed upon EUR/USD, GBP/USD and commodity-linked currencies
- Markets remained nervous ahead of a teleconference between Greece and the Troika, which has already been delayed until 1700BST today
- ECB’s Liikanen said that Eurozone growth risks are substantially on the downside, adding that sovereign debt crisis is not just individual countries' problem, but is a systemic Eurozone crisis
- According to a study by the DIW research institute, Germany's 10 biggest banks need EUR 127bln of additional capital
- According to Japan’s Economic Policy Minister, the country may announce outlines of measures to counter the strong JPY as early as tomorrow
- Moody's said it would finish reviewing Italy's sovereign credit rating for a possible downgrade within the next month, adding that Italy faces a challenging economic and financial environment
Complete conflicted, planted and rumor-based schizophrenia overnight. An article in the FT saying that the Italian government is working on measures to facilitate the sale of the Italian government paper to China provided positive sentiment to the market early in the European session.However, the move was short lived on the back of market talk that China will not buy Italian bonds but instead seek various infrastructure investments, which resulted in a sell-off in equities. Equities came under further pressure after an article in the WSJ wrote, citing an unnamed BNP Paribas executive, that the bank could no longer borrow USDs from the money market, which also resulted in a sharp decline in Eurodollar futures. Weakness in equities provided support to Bunds, and the Eurozone 10-year government bond yield spreads with respect to Bunds generally widened. Particular widening was observed in the Italian/German spread leading up to and following a lacklustre 5-year Italian BTP auction, where the yield hit an all time high. Elsewhere, EUR/USD traded in negative territory during the European session, however did come off its earlier lows as the USD-Index weakened, together with comments from the Italian Prime Minister who said that the Italian Parliament will approve the budget proposals tomorrow. Also, AUD/USD remained under pressure following worse than expected business conditions/confidence data from Australia overnight. In other forex news, GBP/USD lost ground after BoE's Posen said that the central bank should resume its quantitative easing programme.
- Markets focus on Fed Bernanke’s Jackson Hole speech in anticipation of getting a glimpse into the Fed’s monetary policy stance going forward
- S&P sovereign ratings head, David Beers, said that the AAA rating for the US is not likely in the near term, and S&P is looking very carefully at France’s evolving fiscal strategy
- Speculation that the German Chancellor Merkel may be ousted as early as September weighed on the DAX future
- RBA’s chief Stevens said that the central bank may act to lessen the upward pressure on inflation, which helped AUD
- CHF weakened on the back of market talk that the SNB may announce further measures to curb the currency's strength
- Analysts warn China facing pressure from US, EU debts (China Daily)
- U.S. May Back Refinance Plan for Mortgages (NYT)
- US budget watchdog cuts debt forecast (FT)
- ECB ‘Stands Ready’ to EaseDollar-Market Tensions, Dombret Says (Bloomberg)
- Merkel Rejects Seeking Collateral in European Bailouts as Splits Emerge (Bloomberg)
- Europe Banks Lean More on Emergency Funding (WSJ)
- Apple’s Steve Jobs Resigns as CEO, Will Be Succeeded by Tim Cook (Bloomberg)
- Bernanke Signaling No QE Backed by Higher Data (Bloomberg)