Cuban crisis used to assess North Korean market hit

Analysts are pouring over market charts of the Cuban missile crisis in the early 1960s and the war of words over North Korea to assess whether investors’ fright will calm any time soon.

Amid the sabre-rattling between Washington and Pyongyang over North Korea’s missile tests, European stock markets were hit for a third day. Some Irish leading shares, including CRH, have been notably in the firing line because the companies earn a large part of their earnings abroad.

After the South Korean’s Kospi shares index, Ireland’s Iseq Overall index has been among one of the worst-hit stock markets. It has fallen over 2% during a week in which US president Donald Trump doubled up on his “fire and fury” comments with a “locked and loaded” tweet.

Ryan McGrath, senior analyst at Cantor Fitzgerald Ireland, said volatility will continue next week as the market hopes the tone sways away from Mr Trump’s hard line to the more conciliatory rhetoric of his secretary of state Rex Tillerson.

CRH shares have fallen almost 3% in just over a week, while AIB and Bank of Ireland, which for the most part are domestically focused, were little changed.

The winners from the flight from stockmarkets into safehavens have been eurozone sovereign debt.

The implied cost for Germany to borrow for 10 years has fallen by 10 basis points in the last three days, to only 0.39% from 0.49%, as investors sought out the classic havens at times of world tension.

Amid the North Korean tension, the Irish state can theoretically borrow for 10-years at 0.73%, with the yield down by a significant five basis points in recent days.

The yield on the UK 10-year gilt has also dropped, by 7 basis points to 1.07%.

“Provided that war is avoided, we doubt whether that this marks the start of a sustained downturn” in the US S&P shares index, according to Capital Economics in London.

The economists say that the S&P 500 fell after US president John F Kennedy clashed with Moscow at the height of the Cuban crisis but the index had recovered its losses even before Soviet leader Nikita Khrushchev stood down his pledge to keep missiles on the Caribbean island.

Capital Economics said that S&P even rose in the month after the downing of a US spy plane over the USSR in 1960, as well as gaining during the time of the missile tests by China in the Taiwan Strait, in 1995.

“Our assumption is that there will be no war between the US and North Korea.

“We are therefore sticking to our forecast for the S&P 500 to end this year and next only a touch below its current level,” it said.

Philip O’Sullivan, chief economist at Investec Ireland, said government bonds and gold — the traditional safe haven assets — have risen, while the Irish shares index, which is dominated by large companies which earn revenues abroad, is exposed more than most.

Peter Brown, founder of Baggot Investment Partners, predicts stockmarkets will soon rally.

“It could go down by as much as 5% but I see that going back up quickly,” he said. As far as markets are concerned, he believes the Korean crisis will soon be “a non-event”, as the countdown continues to the US reaching its legislative debt ceiling and the German elections, while investors pay attention to interest rates hikes by central banks.


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