The equities and currencies futures markets are offering a few clues on how investors think about the current situation.
We can see that while the large caps pulled back, small caps are moving higher. Why such a move?
The only novelty is Trump menacing the 600B$ trade value with China in order to force China to stop about 6B$ of trades with NK. Who really believes that China will comply? Then it will be up to Trump to either back down or to increase tariffs on some Chinese products (Something that was already being planned anyway.)
This is probably the reason why the Russell 2000 is outperforming.
Note below that The IWM/SPY ratio has been trending up, but did not reach to top of the envelope the way it did in the past out performances. If the Futures are a good sign of what is to come, I believe that this ratio will shoot above the top of its envelope.
On the exchange rates front, the US$ does not show much strength, which indicates that the currency is not used as a safe haven for now.
The Yen is however bought as Japanese investors are obviously more anxious.
Conclusions:
The real danger in NK is more regarding a stray missile that would fall on Japan or on South-Korea. This is hardly a tradable probability.
A more probable event will be the coming tax cut and how this will be financed. I do not believe that Republicans will accept to tax IRA accounts in order to finance a corporate tax cut - or they will lose the midterm elections of next Year.
I suspect that the Fed will delay its decision to unwind QE until the US budget issues are known. This is probably why US equities are still close to their all time highs: the market probably senses (hopes?) that the tax cuts will not be financed, which will push interest rates higher and force the Fed into accommodative solutions (more QE.)
