The sharp increase in tensions rattled financial markets and drove investors out of stocks on Wednesday and into the safety of the JPY, CHF, gold and government debt. Our Nordea Markets research team has looked into the various scenarios and market impact.
What potential scenarios seem likely at this point?
- Scenario 1: No further escalation of the conflict.This is in line with China’s suggestion of “freeze-for-freeze”, where North Korea can e.g. freeze its missile tests in exchange for a freeze in US military activities in the region, but none of the parties really stand down and some risk of escalation remains. We see this scenario as the most likely one.
- Scenario 2: A contained and short military conflict. This scenario entails a limited military escalation between the US and North Korea which is solved swiftly with minor US casualties. Since no other countries are getting involved in the armed conflict, the global consequences are considered to be minor.
- Scenario 3: A potentially uncontained military conflict.A really bad scenario with outright war where global superpowers like China and Russia get involved.
With these scenarios in mind, our Research team examines the potential reactions in markets, fixed income and foreign exchange. Read full article here