Tensions over N Korea could roil markets this week

Tokyo

FINANCIAL markets have finally begun pricing in the risk of a North Korea-centred crisis in East Asia through drops in stock and bond prices as well as in the value of the US dollar. But there could be further turmoil this week as markets seek to assess the size of that risk, analysts say.

That turmoil could be greater and longer-lasting than has been seen likely until recently because the North Korean crisis could be the trigger that sets off a long overdue correction in financial asset prices, some suggest.

"For global investors, the real problem is that nobody can see an endgame," veteran Japan analyst Jesper Koll told The Business Times at the weekend.

"Markets need the dream of a constructive compromise solution, but instead a nightmare appears increasingly likely," he said.

After a week when US President Donald Trump and North Korean leader Kim Jong Un sought to outdo each other in hate speech and threats of mutual annihilation, investors were left wondering whether to take either of them seriously and whether a war of words could turn into a hot war.

"The bluster is all about the complex dance which occurs before any negotiations," Kenneth Courtis, former vice-president of Goldman Sachs (Asia), told BT. But with Pyongyang threatening to fire missiles at Guam and US bombers overflying the Korean peninsula the danger of mis-steps is seen as being high.

Markets would ignore "the admittedly improbable likelihood of military actions at their peril", said the chairman of Private Capital, Hong Kong, and director of Finavestment, London, William Thomson.

"Should war break out, the losses are vast multiples of the upside potential," he told BT.

The North Korean crisis is erupting at a "unique moment in market history", Mr Thomson, a former US Treasury official, said. "We have the most overpriced markets in history based on market fundamentals, coupled with rapidly deteriorating geopolitical fundamentals."

All this "has been supported by a wave of complacency supported by non-sustainable long-term monetary policies leading to another potential Minsky moment", or sudden major collapse of asset values, he added.

Other analysts see yet more factors likely to create a market shakeout.

The US's "turn away from multilateralism and alliance-building towards 'America first' unilateralism and confrontation has created a new game without rules and predictability", said Mr Koll, head of investment firm Wisdom Tree Japan.

"Risk premia will have to rise accordingly, which is analyst speak for a fall in risk asset prices or equities. It is far from certain that America will emerge as a real winner of this crisis because China is waiting to fill the vacuum created in Asia by America's unilateralism."

Were it not for the rapidly rising geopolitical tensions in East Asia, the region could be seen as being "much better priced than the US", in terms of market valuations, Mr Thomson said. "But I don't see how we can exclude these tensions, which seem likely to persist.

"In the event of China playing a constructive role in helping to reduce them, it would probably benefit by not being hit with planned US tariffs - and that would be good for Asia. But Trump needs tensions to persist in order to save his own skin."

According to Mr Courtis, a deal could yet emerge that lifts the crisis threat from North Korea, East Asia and beyond. "Mr Trump likes to be seen as a deal maker and has called Kim a 'smart cookie' whom he would be willing to meet if the conditions were right," he noted.

An essential part of any such deal would be security guarantees for North Korea, provided by the US, China and Russia, along with major economic development, Mr Courtis added. This could involve a natural gas pipeline where South Korea provides the pipeline, Russia the gas and North Korea the labour.