The North Korea Crisis and Why it Matters to Traders – Introduction
Geopolitics is an important topic in the financial world. It plays an important role in determining the direction in which many financial instruments move. For example, in 2015, following the Greek crisis, the Euro had its major loss among the major global currencies. Equally, the pound had major loss last year following the passage of the Brexit vote. In 2015, there were concerns that the Chinese economy was faltering which would have major drawbacks in the global economy. As a result, the major averages had their worst month in January. In this article, I will focus on North Korea and why it should matter to global traders.
- The Genesis
North Korea and South Korea are neighbors. Like in most countries, neighbors have not had the best relationships in the past. In Europe, United Kingdom did not always get along with her neighbors. In the United States, the South always had a problem with the South. The same happened in Asian and African countries. In the Korean case, more than 40,000 people died during the Korean war. In this war, two factions were formed, one supported by the United States and the Western countries and the other one backed by the Soviet Union. The war has never ended. The South and the North have never signed a document signaling an end to the war.
At the demilitarized zone – that borders the North and South – thousands of troops in both sides remain there waiting for provocations which would lead to another war. After the war, South Korea, with the help of the West adopted democracy and prospered. It is now home to some of the leading global brands in the world like LG, Hyundai, and Samsung. The North adopted a communism-centered government and became poorer.
To protect the regime from Western influence, the North started creating nuclear weapons. For years, their goal was to have the nuclear weapons be able to reach the United States. The aim of these weapons are to protect the regime from being overthrown. Today, North Korea is one of the poorest country on earth. It is going through one of the worst famines in history.
- The implications
North Korea is a lonely country with very few allies. Its main trading partner is China which is its neighbor. For years, the strategy for the Western country to dissuade the country against weapons of mass destruction has been to engage China which is its biggest trading partner. China can suspend trade with the country until it stops making the weapons. The challenge for China is how to balance between its own trade interests to the country with the nuclear issue. China knows that a nuclearized North Korea would cause tremendous challenge in case of war.
The challenge is that Kim-Jong-Un is unlikely to stop manufacturing his weapons. The precedence supports it. Libya and Iraq denuclearized and its leaders were killed. Kim would not want that.
This weekend, sanctions proposed by the United States which will impend trade with the country were passed with the help of Russia and China.
- For traders
Traders should follow the happenings on this issue carefully. This is because there are major opportunities to gain from it. While war is not good, several sectors are bound to benefit from it. For example, in case of war, there would be need for defense items which makes products from defense companies like Lockheed Martin, Boeing, and United Technologies. This means that probably, the stock of these companies would go up. On the other hand, other sectors like industrials and finance would go down. Several currencies would go down while others would go up.
Like I have mentioned before, we traders are only interested in the movements in the items we trade. We are not interested in the intrinsic value of the things we buy and sell.