Mutant market reactions to big events means one of two things. Investors have concluded it does not matter, or they are unsure how to quantify it. In the case of North Korea's nuclear test on Sunday, it's the latter.
On Monday, havens, including gold and the yen rose, while Japanese and Korean stocks fell, but all the moves were relatively restrained. Japan, South Korea, and China between them represent the world's second or third largest stock markets and the two biggest countries in the emerging market universe. Japan and China are also both key players in global debt markets. And the yen is the most-traded currency in the world.
The stakes of global investors are indeed high. Although, foreigners limited interest in China's onshore markets reduces their significance in portfolios. They often send contrary signals too. On Monday, Shanghai and Shenzhen close 0.4% and 0.6% higher, even as Tokyo fell 1% and Seoul dropped 1.2%.
Assessing the market's risk posed by North Korea involves a situation that's once familiar, yet, also terrifyingly complex. Investors have spent decades factoring in the effects of hostilities between the rogue state and the outside world. A recent report by Nomura, which puts tensions the highest since 1994, identifies 10 outcomes under four scenarios, they span negotiations to US intervention or even a military coup.
Few of many analysts believe that outright war is the most likely outcome. Even those factoring in the potential for actual conflict struggle to measure it. In spite of their analysis, the [INAUDIBLE] team included the effect on Korean stocks from a war that likely be too catastrophic to deal in any specifics. The scale of Monday's moves in the yen, Tokyo stocks [INAUDIBLE] and the Korean [INAUDIBLE], would not rank as a top 10 event for any of them for 2017.
Monday's US bank holiday would have played a part too in damping the reception with only limited trading treasuries and no Wall Street action to look to. The only market with an outsized reaction on Monday was the Korean stock market. It's 1.2% fall ranks as its fourth worst day this year. The other ones, the worst ones came in July and August. Now this suggests that even as more global assets are holding their nerve, Korean investors are starting to price in some scary outcomes.