The nights leading up to key holidays are always good for two items in financial markets, and American monetary economies in particular – they are typically lighter in volume than regular trading days, and for whatever reason, they normally harbor extraordinary activities that, due to the lighter trading volume, have outsized impacts on the markets. And so it has been so far the previous 10 days – word of a enormous insider-trading investigation involving many of the main names in hedge funds and a North Korean attack on South Korea would unnerve the stock market in the end of June. Two nights just before Thanksgiving, they sent the marketclub for a tailspin.
Of the two, we’re far more concerned about Korean circumstances. It will appear as really small surprise, following scandals of the scale and intricacy of an AJ Brown or a Madoff, to learn that a cadre of Wall~ Street fund managers applied market and scene specialists as non-public sources of information. Whilst it may possibly ensnare a few of brand-name funds and high-profile investors, we don’t foresee any key market-wide repercussions beyond capital flight from the funds affected and, potentially, extra regulation on how this kind of authorities share their knowledge. Neither troubles us really a lot.
On the other hand, the Korean circumstance is one volcone that could turn into strategically extremely problematic. Beginning with the sinking of a South Korean corvette previously this year, allegedly by a North Korean concussion torpedo and culminating with attack just recently on a disputed piece of land around the DMZ in between South and North Korea, North Korea’s aggression and rhetoric signal an important shift in how it perceives its function in the area and the globe. We also notice that the timing of the assault was not arbitrary; it came a day after North Korea unveiled yet another uranium manufacturing facility, effectively giving the U.S., China, Russia and Europe the collective finger.
Viewing past the military and geopolitical ramifications of North Korea’s belligerence lies our concern with the financial ones. Following the economic disaster, the globe has pulled out a lot of the stops in terms of policy measures – there is not a lot of ammunition still left in fiscal or monetary actions that can be taken to thrust the worldwide economy further towards recovery, and as the ongoing Eurodebt disaster shows, sovereign defaults by Ireland, Greece, Portugal and Spain are no longer fanciful speculation but true possibilities. A key geopolitical event is the last thing the worldwide financial system needs right now, and it would have substantial negative impact on international progress were the two Koreas – and by extension Japan, China, Russia and the U.S. – to get into a major open conflict.
One upside of all this volatility has been the stabilization in the commodity trading markets, which had been correcting heading into this week, and continued weakness in the Euro. In reality, the Euro is at its weakest point since September. We anticipate the Eurodebt predicament can get a whole lot worse before it will get better, pushing lower the Euro, while the fiasco in North Korea is pushing the greenback upwards.
In the meantime, there is a swift trade in military-related stocks due to the heightened tensions in Asia. Though they normally rise and drop with the U.S. military budget, aerospace and defense stocks should find some footing as sabers continue to be rattled overseas, adding to the stabilization witnessed when the Republicans swept the midterm elections.
If we’re correct, the interval in between now and Christmas may be unsettled indeed. This bodes well for several of Cash Cow’s primary pillars – commodities, a greater valuation of the dollar, lower U.S. interest rates, and certain sectors like Defense. And as for the insider trading investigations, at least we’ll all possess something interesting to read over the holidays.
