Business

All eyes on N. Korea, US debt-ceiling saga and the greenback

There's more to North Korean leader Kim Jong Un and United States President Donald Trump than their hairdos - both have played a significant part in influencing stock-market movements the past few weeks. And both are likely to continue to do so in the days ahead.

Mr Kim has indulged in defiant fist shaking at everyone other than Russia and China with his missile tests and a hydrogen bomb detonation on Sept 3.

This in turn brought "geopolitical risk" to the forefront, though many believe that, judging by Mr Kim's track record, his belligerent overtures will eventually amount to nothing.

Over in the US, Mr Trump has been defying his detractors for most of his nine-month tenure with his brand of "outsider" politics, after being elected on a platform built on his self-proclaimed status as being outside of the influence of Washington's political mainstream.

But even though his track record in office is not resplendent with success, Wall Street has bent over backwards to give him the benefit of the doubt, with stocks still supported by hopes that his promised tax reforms and projected spending increases will eventually gain congressional approval.

One also suspects that there is an element of "bad news is good news" at play - namely that if US economic data is weak, then Wall Street could interpret it as lessening the need for interest-rate hikes, in which case stocks are a "buy".

Whatever the case, Mr Trump last week defied his Republican party mates by striking a three-month debt ceiling deal with the Democrats - a move which, even though it would widen a growing rift between Mr Trump and the Republican Party, was typical of the unpredictable US president.

Rabobank in its Special Report on Friday said the deal to avert a government shutdown and default has reversed the recent rise in yields on Treasuries that were due to mature near the implied default window, which is within the next month.

But if the agreement is approved by Congress, there will be a new deadline for a government shutdown in December, while the debt ceiling will return next year, several months before the mid-term elections.

"Mr Trump's bipartisan approach opens the door to more progress on legislation, but both Mr Trump and the Republicans will have to compromise as the Democrats now have increased leverage," said Rabobank.

"This could reduce the size of tax cuts for corporations and high-income individuals that Mr Trump and the Republicans have in mind."

What North Korea does and how the debt ceiling saga plays out look set to dictate how Wall Street moves in the week ahead and, by extension, the Straits Times Index (STI).

Also a factor is the recent weakness in the US dollar, which could be because the bulk of investors have for years been overweight US stocks and underweight Europe and - now that Europe's growth seems to be taking off - are now in the process of shifting between the two.

If so, this could explain the slide in the greenback.

How this will impact the market here is not clear, although our guess is that it could provide some support, as it did on Friday when the STI rose despite an 80-point loss for the Dow futures.

Meanwhile, traders may wish to consider buying insurance in the form of put warrants on the STI and Hong Kong's Hang Seng Index.

In a world where the leaders who have their fingers on the nuclear launch buttons are as unpredictable as they are, that is about the best advice we can think of.

This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts