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Déjà Vu

04 September 2017 by lberuti

It felt like “déjà vu” this morning as the week-end headlines were once again dominated by the latest North Korea missile test. Yesterday’s was a “perfect success” according to the Korean Central News Agency, as an underground explosion caused a magnitude 6.3 earthquake. It set the stage for a weak session, but with each development more serious than the last – and each coming in quick succession – financial markets will surely have more thinking about what the endgame is here in the coming days. Last week’s missile launch over Japan was brushed aside as a mere act of bravado, and the measured reaction from the US helped the market do so. The nuclear test over the week-end might be more difficult to ignore, and the current assumption that a stalemate is the most likely outcome could be challenged. If further escalation were to be priced in at some stage, there would be a fair few extra hedges to be bought. There is currently hardly any positioning on the back of it, and it could take the market a fair amount wider than the 1bp increase of iTraxx Main’s risk premium we have witnessed today.