Geopolitical tensions rose Tuesday afternoon as pointed rhetoric was exchanged between President Trump and North Korea’s leader, Kim Jong Un. The buildup to Tuesday afternoon started, however, on July 28th when North Korea tested its second intercontinental ballistic missile (ICBM). The missile was estimated to have put U.S. mainland cities such as Los Angeles and Chicago within range of its potential destruction. In response, this past Saturday, August 5th, the United Nations Security Council voted unanimously to pass a sanctions resolution against North Korea aimed at reducing approximately $1 billion in its foreign export revenue. This was viewed as a significant win for the U.S. sponsored resolution, as China voted in favor of the increased sanctions.
On Tuesday it was revealed that a Defense Intelligence Agency report from July 2017 stated that North Korea had successfully miniaturized a nuclear weapon capable of being placed on an ICBM. Following the release of the report, President Trump called for a media briefing while on a working vacation at one of his golf course properties in New Jersey. At the press briefing President Trump addressed the increased threat from North Korea saying that any more direct threats against the U.S. “will be met with fire and fury like the world has never seen.” The language from President Trump has been taken as one of the strongest rebukes of the North Korean leader in recent times.
Following the remarks, North Korea released a statement in direct defiance of President Trump which threatened the U.S. territory of Guam. The threat included a specific claim of using missiles to target Andersen Air Force Base on the island nation. Andersen is the home base of B1-B bombers which have recently been involved in flyovers of the Korean peninsula in a show of force and deterrence against the radical North Korean nation.
In response to the increased geopolitical tensions, safe haven assets received a strong bid Wednesday morning. The Swiss franc was up over 1% against both the euro and greenback as investors flocked to the traditional safety of the currency. EURCHF touched as low as 1.1262 on the day and was on pace for the largest one day decline in over two years. The move is the largest since the Swiss National Bank removed the currency peg with the euro in early 2015. The yen, another traditional safe haven currency, also made gains as USDJPY dropped below 110. Its marginal gains, though not being as strong as the franc’s, were most likely due to the close proximity of Japan to North Korea and the epicenter of current tensions.
U.S. treasuries also received a bid early on Wednesday, but sold off as the day went on to close around 2.25% for the 10-Year, still up over a basis point on the day. German bunds and 10-Year JGB’s were both higher on the day as global assets chased safety. The geopolitical tensions are working to provide demand for U.S. treasuries after the government bonds sold off earlier in the week due to a better than expected JOLTS job openings report. The record number of job openings paired with the strong NFP report from last Friday helped to mold a strong image of the U.S. jobs market. The JOLTS report was also good news for wage growth and overall inflation as employers chase a decreasing number of applicants to fill an increasing number of positions. This increased demand should drive wages up over the coming months as the trend continues.
As the week continues, there is no doubt that the drama between President Trump and Kim Jong Un will continue. The severity of the rhetoric and potential responses taken will ultimately determine whether or not the bid for safe haven assets is maintained.