The latest missile launch by North Korea on Tuesday will elevate tensions for some time, but it will be contained, writes Kwon Young Sun, a senior economist at Nomura International.
Quoted by Bloomberg, Kown writes that Tuesday's provocation has reignited market concerns just as tensions were seen easing through mid-August. As a result, "tensions between N.Korea and the U.S. reached levels unseen since 1994." He adds that another spike is plausible, considering the military drill between the U.S. and S.Korea is still ongoing.
Oddly enough, as we discussed earlier, despite the latest geopolitical shock, the South Korean stock market and currency were barely shaken. However, according to the Nomura strategist, unless the dollar keeps weakening, other drivers that could limit KRW’s strength include Korea’s relations with China, trade tensions with the U.S., local capital outflows and intervention by the authorities
More apropos to what is bother markets this morning, Kwon writes that "although it is hard to predict", three early warning signals may suggest imminent U.S. military action:
- U.S. orders for evacuation of U.S. citizens in S.Korea
- U.S. military builds up large scale force near the Korean peninsula
- U.S. elevates defense readiness condition to level 3 from level 4
Finally, he writes that the "probability for war ultimately breaking out on the Korean peninsula is about 35%", although the number is most likely to change going forward.