Trump and Kim go ballistic

I'll see your "fire and fury" and raise you Guam.

Yes Virginia, that's Trump and Kim going ballistic once again as they play high stakes ICBM poker. Who will be the first to blink and fold? From what we already know of each players' character and temperament neither Donald nor Jong-un would back down.

Financial markets are correct to be worried. The VIX index - the "fear gauge" - jumped by 44.4% overnight; the S&P 500 index dropped by 1.5%; and the yield on US 10-year Treasuries fell by five basis points.

But we've seen this game of chickens and one upmanship before - only four months ago (April) - with similar reaction from the financial markets - VIX up, equities down and bond yields lower.

This was what I scribbled at the time:

On his visit to Seoul, the US vice-president warned that: "The era of strategic patience is over. President Trump has made it clear that the patience of the United States and our allies in this region has run out and we want to see change. We will defeat any attack and we will meet any use of conventional or nuclear weapons with an overwhelming and effective response ... all options are on the table."

North Korea's response, delivered by deputy ambassador to the United Nations, Kim In Ryong, at the UN headquarter in New York (yes, in the US), was "If the United States dares opt for a military action ... the DPRK (Democratic People's Republic of Korea) is ready to react to any mode of war desired by the Americans ... We will take the toughest counteraction against the provocateurs."

War seemed real and imminent that time as it is now. Since then, the S&P 500 index has trekked higher to record highs, the VIX index came back down to (very) low levels and US bond yields returned to speculating on the Fed's next move.

In hindsight, the April 2017 experience proved to be a healthy correction for the equity markets. It got rid of those only along for the ride and aren't entirely convinced of continued gains while at the same time allowing investors to buy the dips or average down on their existing holdings.

This time will be no different. More so, because US economic growth fundamentals are stronger now than what it was four months ago in April.

Besides, the headlined 44.4% jump overnight took the index up to a reading of 16.04 - only slightly above April jitters' level of 15.96 but lower than the 16.30 reading recorded in mid-September last year when Trump was closing in on his election war with Hillary and the Fed rate hike speculations were the "fear du'jour". But even that was not high enough compared to 2016's high of 27.59 triggered by China's devaluation of its currency and expectations of a sharp slowdown in its economy.

This is not to say that the fear gauge won't increase further or sell downs would stop in the equity markets. But if ever that happens, we know that the Fed (and other central banks) would respond with counter-measures.

That said, a nuclear war would introduce new dynamics for the financial markets. This, or we'll all be glowing in the dark.

Read more: TrumpFedVIXS&PUnited StatesGuamDPRKKim In RyongNorth Korea
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