The Korean Peninsula Is Driving Fresh “Risk-On” Sentiment

Activity on the Korean Peninsula is on the market’s mind as the U.S. trading week opens. U.S. equities indices are mixed amid a dramatic sell-off in gold and considerable loss in WTI crude oil. “Risk on” appears to be back in style. 

What A Weekend

Several items hit the newswires over the weekend that have this morning’s markets buzzing. Developments regarding the denuclearization of North Korea are the undisputed headliners:

• North Korea declared it is to suspend all nuclear weapons and missile testing for the near future.
• Kim Jong Un stated that he is willing to accept “complete denuclearization.”  
• North Korea and South Korea are scheduled to meet Friday in the first inter-Korea summit in more than a decade.

Mainstream media outlets in the U.S. have reported these items in many tones. Some euphoric, others extremely skeptical. Things that look too good to be true usually are — perhaps the budding peace on the Korean peninsula will be the exception to the rule.

A Quick Look At The DJIA

The chaos of early 2018 seems like a distant memory. The DJIA continues to trade within February’s range, near the 25,000 level. Over the past 8 sessions, a pattern of relatively tame daily ranges has emerged.

Overview: 25,000 is the key number in this market and the benchmark by which the Trump rally in U.S. equities is measured. If below 25,000, analysts are talking about “correction” and a possible massive selloff. If above 25,000, the consensus is rosy. Right now, we are slightly below 25,000 and it is anyone’s ballgame.

A breakthrough of peace between North/South Korea and denuclearization of the Korean peninsula is the fundamental catalyst that long-term equity bulls are looking for. With strong U.S. economic performance and corporate earnings expected, an easing of tensions with North Korea would be icing on the cake.

A deal between North Korea, South Korea, and the U.S. will take “risk on” to the next level. If this scenario comes to pass, the “Trump Rally” is just getting started.