Macro Digest: The art of a North Korean deal

Steen Jakobsen

Chief Economist & CIO
Steen Jakobsen first joined Saxo in 2000 and has served as both Chief Economist and Chief Investment Officer since 2009. He focuses on delivering asset allocation strategies and analysis of the overall macroeconomic and political landscape as defined by fundamentals, market sentiment and technical developments in the charts.

So… the on/off Trump versus Kim meeting is on and it’s happening in Singapore, which means the open duel will be performed from 21:00 pm EST or 3:00 CET tonight/tomorrow morning.

Live coverage is available through Channel NewsAsia via YouTube.

President Trump needs this summit to work, probably more than does Chairman Kim, or as his official title reads: Respected Comrade Kim Jong Un, Chairman of the Workers’ Party of Korea, Chairman of the State Affairs Commission of the Democratic People’s Republic of Korea and Supreme Commander of the Korean People’s Army.

Trump entered the White House wanting to put his mark on history by creating peace in the Middle East . This concept/idea is now out of reach, and Trump’s focus has moved on to making the summit with North Korea his marker.

He also needs a victory in order to create and keep momentum on his dealmaker image as November's midterm elections nare drawing near.

Some investors I talk to go as far as to say that the president needs a deal on either North Korea or Iran to “live” beyond November. This is something I partly agree on (as incoming data clearly show).

The likely outcome

Failure: getting “in the room” with Chairman Kim leaves Trump uneasy and talks end inside two hours
Modest success: the bare minimum is an official US/North Korean truce (the 1950-53 war never officially ended).
Success: North Korea agrees to monitoring and a limited reduction in long-range missiles; the US slightly eases sanctions.
Big success: North Korea accepts full denuclearisation and monitoring in exchange for the US abolishing sanctions.

There are many problems in communicating progress on this front, one being the clear difference in how the US and North Korea define "denuclearisation". North Korea will only give up nuclear weapons if Washington meets certain conditions, which include removing American troops from South Korea.

In terms of the market's reaction to different scenarios, the biggest move is likely a risk-off swerve if the talks end in failure or if we see only modest success without hope for further talks. This could increase appetite for military intervention to penalise Chairman Kim, but for now somewhere neutral is the most likely outcome.

We will monitor the talks and don’t forget that after the “theatre” we have the European Central Bank and Federal Reserve meetings setting the agenda for monetary policy.

Some useful links explaining the US/North Korean summit

   • Surreal Trump-Kim summit defies diplomatic playbook (Politico)
   • Trump Kim summit: North Korea eyes 'new relationship' with US (BBC)
   • Trump's "great man" play on North Korea (Axios)
   • 'Denuclearisation' likely means different things to Trump and Kim Jong-un (NBC)
   • Trump needs a tough North Korea deal, but not because of Iran (Bloomberg)
   • Donald Trump’s demolition theory of foreign policy won’t work

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