While the United States recovers from Hurrian Harvey in Texas and potential landfall of now Hurricane Irma later this week, you would think America would have enough on its plate, but it turns out there is one other, more pressing, if not as immediate, concern with North Korea. North Korea has continued to defy the UN resolutions and sanctions throughout this year with their continued tests of nuclear missiles within US mainland range.
Photo Credit: UK Express
2017 First Missile Launch
Just in July, Kim Jong Un’s military fired two long range ballistic missiles with intermediate effect, flying for 45 minutes and going 2,300 miles high and traveling 1,000 miles, which if fired was speculated that if fired in a traditional manner, could have easily hit Los Angeles, Denver or Chicago. But despite the distance, it was rumored that the missiles were not carrying warheads, a weight that would significantly change the missile trajectory. It wouldn’t be the first time North Korea exaggerated or falsified weaponry success. Yet despite downplaying the event, David Kestenbaum of NPR states that if North Korea had created a successful nuclear bomb, they would be right on track of military expert opinion. “…when it came to North Korea, I've talked to people, various experts, and they would say something like, we have a decade. It's going to take them a while to get there… and that was about a decade ago.” After the launch, Trump reactions were more threats of war and stronger sanctions, a possible bluff Kim was stating to be calling with his “stern warning”. Along with America, Japan led international condemnation of North Korea’s attempts especially since the timing of the missile test was along with anniversary of the end of the Korea War (1953). South Korea also stated their intentions to curb further Northern threats while Russia downplayed the whole event, stating it was not an ICBM, merely an “intermediate” weapon.
Photo Credit CNN
2017 Second Missile Launch
Flash forward to Labor Day weekend and we are at yet another North Korean missile test, with more possibly on the way according to South Korean spies, with little change since July. In efforts to create a global response to the missile test, all that has occurred since July has been US and Chinese quarreling and more Trump empty threats of sanctions against those who do business with North Korea, but little has been done. So what is left to do now? The situation is tricky as any military action against the US will likely harm South Korea, making South Korea hesitant, China and Japan both want to avoid military conflict as well but trade sanctions seem to not have the desired effects. Extreme efforts such as threats to cutting off trade with China, are extremely unlikely but cutting off financial institutions that work with North Korea from US trade could have strong effects, according to Dubowitz. Then Chinese companies would have to make a decision, North Korea or US. What we do know is that US and Chinese actions will have direct consequences to how this all plays out.
Photo Credit: BBC
Market Reactions
In the markets, these tests have rattled South Korean stocks with threats of spreading from financial markets to the lived economy. The Asian four week high plummeted across the board with MSCI Asian Pacific Index falling 0.5%, Hong Kong’s Seng Index losing 0.8% topping three straight days of losses and Straits Times Index falling 1.4%. Japan’s Topix stock index has also reacted, dropping 1% and Japanese futures in the S&P 500 dropping 0.4% while the yen strengthened 0.7%. Some investors are using the opportunity to purchase in equities in South Korea, seeing the uncertainty as an advantage.
What’s interesting with all of this is that gold is reacting to certain fundamental triggers the way it is supposed to but also it looks like it might be able to break its resistance. That’s the reason I like a long gold trade. And as you can see, the 1290 right up to 1300 area has been resistant for the last couple months or so and gold has had a nice run up to that area, then pulls back goes up, and then pulls back. And what we noticed was just a couple weeks ago when gold reached the 1300 and again it pulled back, it had very narrow trading days and then closed above the 1300 level. When gold did that that means to me it was another long trigger. The levels I was watching for was around 1340 and then if we break through 1340 I think we can get to 1380 and test the resistant area that was established last year in the 1380 area. You can see more in my gold analysis video from last week. If you look at that video you can see how we are watching this market and the expected levels for Gold to get to after the break and close over 1300. And all the while we see the North Korea situation keeps escalating and the more it escalates the more I think there’s more fundamental support for gold.
The next market I want to touch on is the crude oil market. As we know, I have been trading crude oil quite a bit this year. Crude started going higher as Hurricane Harvey came into play, but one thing I am always aware of though is if crude goes up because of a hurricane, I am careful about that long trade. We have to wait till after the hurricane to see what is truly happening. I still personally feel that the long is not the best trade at this point, it could break out and go higher, but I feel the $50 area is the resistance. But if crude comes lower after the Hurricane Irma there may be a short entry for that. I am not saying that it can’t go higher, but if crude can’t break the $50 area after all the damage caused by Harvey I feel that the short might be the stronger trade. As always, when trading make sure you have several protective risk management stops and until next time.
Happy and Successful Trading!
Mukarram Mawjood, Founder and Head of Trading
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