Monday night North Korea fired a ballistic missile over Japan and into the Pacific Ocean:

North Korea has fired a ballistic missile that passed over Japan, Prime Minister Shinzo Abe told reporters early Tuesday.

A South Korean military official told NBC News that the missile was fired around 5:57 a.m. local time on Tuesday. The official said that the missile flew for about 2,700 kilometers (1,678 miles), reaching a maximum altitude of 550 kilometers (342 miles). U.S. Pacific Command projected that the missile splashed down at 6:29 a.m. local time.

Later Tuesday, Abe said the missile was an unprecedented, serious and grave threat to Japan. The Japanese prime minister said he would ask the United Nations to up the pressure on Pyongyang.

Tensions have been heightened between North Korea, South Korea and the U.S. since February when North Korea launched an intermediate range ballistic missile into the Sea of Japan. Experts assumed the missile test was designed to test the preparedness of the new Trump administration. Nonetheless, having launched a missile shortly after the election was bound to get President Trump’s attention.

The Trump administration responded by positioning military assets in South Korea. The U.S. deployed the Terminal High Altitude Area Defense system (“THaad”), designed to protect South Korea against attacks from short and medium-range ballistic missiles. Thaad’s infrared seeker technology is designed to detect incoming threats and strike the target with a missile of its own. The problem is that Thaad’s presence might have further heightened tensions on the Korean peninsula. The South Korean populace has looked askance at the United States’ beefed up military presence there. China doesn’t want Thaad because it could potentially help the U.S. track Chinese missiles aimed at the U.S. Lastly, North Korea sees more U.S. military assets on its border as a threat.

Impact On Financial Markets

In pre-market trading the Dow Jones (DIA) was down by triple digits. Financial markets do not like risk and it is difficult to quantify the unknown. North Korea’s previous missile launches were sent into the Sea of Japan; to send a missile over Japan is dangerous and unprecedented. War games would likely be good for defense stocks, but I cannot see how broader markets would benefit. The U.S. financial markets have been buoyed by record low interest rates and trillions in economic stimulus, and the bull market appears long in the tooth. Markets are on edge that the Fed will eventually take away the punch bowl by hiking rates or unwinding its holdings of government treasuries and mortgage-backed securities.

The last thing markets need is uncertainty over North Korea. How would a conflict impact Trump’s plan to cut corporate taxes? Would it potentially derail the president’s planned infrastructure spending? These concerns alone could be enough to send stocks into a tailspin.

Is Diplomacy Still Possible?

The U.S. and China have tried issuing economic sanctions against North Korea. In February China banned coal imports from North Korea after Kim Jong-Un successfully fired a ballistic missile. The lion’s share of North Korean coal is shipped to China. Still, North Korea has persisted in its provocations. Monday’s missile traveled 1,678 miles. To hit the American island of Guam a North Korean missile would only have to fly about 2,100 miles. Monday’s action seems to be a message from Kim Jong-Un that he could attack U.S. soil if he wanted.

The Trump administration would like to cut North Korea off before it develops the capability to hit the continental U.S. On the flip side Kim Jong-Un wants to run his country without interference. He believes that only a nuclear threat to the U.S. could defend him against regime change that befell Moammar Gaddafi in Libya and Saddam Hussein in Iraq. Global markets hang in the balance if the two sides cannot find a happy medium.

Conclusion

Kim Jong-Un wants assurances that the U.S. will not attempt to remove him from office. The U.S. and the rest of the world want North Korea to stop trying to extend its nuclear capabilities. I do not envision either side coming to an agreement anytime so, which portends more volatility ahead for financial markets.

This article could also impact the following securities: (SPY), (QQQ), (EWY), (DBKO), (KORU), (KOR), (FKO), (HEWY), (EWJ), (DXJ), and (DBJP)

 


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