Societe Generale: US-North Korea risks to market skewed to the negative

China yuan coins

The market is pricing in “negligible” risk from the U.S.-North Korea summit, but there’s an asymmetric risk, Societe Generale said in a note on Friday after speaking with clients in Singapore about foreign-exchange and rates.

“We argued the market reaction to North Korea related risk would be asymmetrically skewed toward the negative side,” it said, noting that “nobody” appeared to have priced in investment implications of the summit.

The talks, originally set for June 12 in Singapore, were abruptly canceled by U.S. President Trump in a strangely worded “open” letter, dated Thursday. But over the weekend, there were claims from the Trump administration that the talks may yet proceed on their original date.

Whether or not the talks proceed and whatever the end result, Societe Generale expected negatives would have a greater market impact than any positives.

“Any materially positive impact on Korean economy from a possible cooperation/investment with North Korea will likely take long time in our opinion, with which investors generally agreed,” it said. “Instead, if any disruption on talks takes place as we see now, the risk off sentiment will likely prevail and set to weaken the Korean won.”

The bank said it didn’t expect a major impact on South Korean rates, with “nothing much priced in,” but risk-off sentiment could lead to less scope for Bank of Korea tightening.

Societe Generale recommended a tactical long offshore yuan (CNH) against the South Korean won trade heading into the summit.

But it pointed to a risk to its view: [if] “China and South Korea are bundled to be responsible for this setback in U.S.-North Korea talk, which can translate into more tough trade negotiation with the U.S.”