This week saw quick reversals on the North Korean front as the anticipated summit was canceled as unexpectedly as it was set only to be on again…maybe. The cancellation came at the command of US President Trump in response to the North Koreans’ failure to attend a planning meeting and a press release with reference to avoiding the fate of Libya’s former leader Muammar Gaddafi. Instead of escalating the situation further after the cancelation, the North Koreans’ responded saying they remain open to meeting which garnered a favorable response with Trump now thinking they may want to take the meeting after all. It is diplomacy by chaos but it seems to be working. Financial markets are adjusting to it. When the news broke on Thursday, equity markets fell only 1% from the previous close about mid-day and ended up nearly flat regaining almost all that had been lost. It seems that events with significant potential consequence are now being discounted as being a passing comment that will likely reverse. Desensitizing traders to minute-by-minute news flow may help moderate volatility in the short-term, but it also increases the risk of complacency in the long-term when an event of significant magnitude occurs and sticks.
Another on again/off again market issue occurred in oil on Friday. Comments by OPEC and Russia regarding relaxing some of the output caps that had been imposed to stabilize prices (especially in light of declining inventories which we remarked on in prior weeks) caused crude oil prices to fall 4% to end the day below $68 per barrel in the US (West Texas Intermediate). Energy stock prices followed in due course giving back a bit of the gains made in recent weeks as investors finally started to believe higher prices were here to stay. It was thought that the cartel was focused on $80 per barrel price (for Brent which is around $76 after today’s decline) to balance sovereign budgets but not cause disruption to energy-intensive growers like China and India. The idea is to open up the spigot to offset supply reduction from sanctions in Iran and shutdowns in Venezuela to prevent prices from going higher from here. While it is our belief that market forces can overwhelm attempts to manage it (even with the supply control that a consortium like OPEC has), if they manage to succeed in keeping prices stable at this level there is likely upside in energy equities that have yet to catch up.