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North Korea Says It Successfully Test-Fired A Nuclear-Capable ICBM Which Can “Avoid Interception”

North Korea said it successfully test-fired a new type of medium- to long-range ballistic missile that is capable of carrying a nuclear warhead, the country’s state-run media said Monday. The North Korean missile flew over 500 kilometers, landing in the sea and stirring up world leaders, with the US rushing to reassure its allies South Korea and Japan.

The Korean Central News Agency (KCNA) said the Pukguksong-2 strategic weapon system was successfully test-fired Sunday adding that the missile launched from a mobile launcher used solid propellants and a new high-thrust engine developed in the country. The missiles also proved it can engage in evasive maneuvers during flight, the North said which is of note following the recent US deployment of Terminal High Altitude Area Defence (Thaad) in South Korea, meant to engage and intercept rogue launches by North Korea (while making China very nervous).

North Korea has conducted five nuclear tests, including two last year, although its claims to be able to miniaturize a nuclear weapon to be mounted on a missile have never been verified independently. KCNA said the missile was fired at a high angle in “consideration of the safety of neighboring countries” Reuters reported. A South Korean military source said on Sunday the missile reached an altitude of 550 km (340 miles).

North Korean leader Kim Jong-un was present for the launch and stressed that with the Pukguksong-2, Pyongyang now has another means to deliver nuclear weapons according to Yonhap. The country has tested a total of five nuclear devices since 2006, with two being detonated last year. The missile was launched at a high angle to take the security of the neighboring countries into consideration. The test-fire proved the reliability and security of the surface launch system, and the new engine, the news agency said.

The new missile was also successfully tested for its ability to dodge interceptors with evasive maneuvers, Yonhap news agency cited the statement as saying. Another major boost for North Korean missile technology is the solid fuel engine said to be used in the new weapon. Pyongyang has been testing the engine, which would give the rockets greater range and make the launches harder to detect, over the past year. The technology was said to be tested previously in a submarine missile launch.

“Now our rocket industry has radically turned into high thrust solid fuel-powered engine from liquid fuel rocket engine and rapidly developed into a development- and creation-oriented industry, not just copying samples,” Kim was quoted as saying by the KCNA in English. 

The development of the new strategic weapon system will allow the People’s Army to perform its duties most accurately and rapidly in any space: “under waters or on the land,” Kim said. The communist regime leader ordered the development of a surface-to-surface ballistic missile with extended firing range on the basis of the success made in the submarine-launched ballistic missile test in August last year, it said.

Meanwhile, as Reuters adds, despite his campaign vows to take a tougher line with North Korea, President Donald Trump’s restrained public reaction to Pyongyang’s first ballistic missile launch on his watch underscores that he has few good options to curb its missile and nuclear programs.

The responses under consideration – which range from additional sanctions to U.S. shows of force to beefed-up missile defense, according to one administration official – do not seem to differ significantly so far from the North Korea playbook followed by Trump’s predecessor, Barack Obama. Even the idea of stepping up pressure on China to rein in a defiant North Korea has been tried – to little avail – by successive administrations. But Beijing is showing no signs of softening its resistance under a new U.S. president who has bashed them on trade, currency and the contested South China Sea.

More dramatic responses to North Korea’s missile tests would be direct military action or negotiations. But neither appears to be on the table – the first because it would risk regional war, the latter because it would be seen as rewarding Pyongyang for bad behavior. And neither would offer certain success.

“Trump’s options are limited,” said Bonnie Glaser, an Asia expert at the Center for Strategic and International Studies think tank in Washington.

As noted last night, Trump’s initial public comments on Saturday on the test launch of what was believed to be an intermediate-range Musudan-class missile were unexpectedly measured – and brief – compared to earlier bluster about another U.S. adversary, Iran, since he took office on January 20.  “I just want everybody to understand, and fully know, that the United States of America is behind Japan, our great ally, 100 percent,” Trump told reporters in Palm Beach, Florida, speaking in a solemn tone alongside visiting Japanese Prime Minister Shinzo Abe.

The U.S. president did not mention North Korea or signal any retaliatory plans for what was widely seen as an early effort to test the new administration. By contrast, Trump tweeted “It won’t happen!” in January after North Korean leader Kim Jong Un said the North was close to testing an intercontinental ballistic missile.

While no one can rule out that Trump might still take to Twitter with harsh rhetoric as he often does, some analysts said his relatively subdued initial statement could show that aides have convinced him not to be baited by Pyongyang into issuing threats that would be hard to carry out, especially while his North Korea strategy is still being formulated. It might be a welcome change.


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Hezbollah supports Syria ceasefire and political talks

The Lebanese Hezbollah movement strongly supports the Syrian ceasefire agreed on in Kazakhstan and any truce that could lead to a political solution, its leader Sayyed Hassan Nasrallah said on Sunday. Moscow and Ankara brokered a shaky ceasefire in December between the Syrian government and rebel groups opposed to President Bashar al-Assad. The agreement led to indirect talks last month in the Kazakh capital of Astana, where Russia, Turkey and Iran agreed to monitor the fragile truce. Several senior Hezbollah commanders and hundreds of fighters have died in Syria, where the Shi’ite Iranian-backed group is fighting in support of Assad. Read: Iraq Hezbollah leader assassinated in Basra “Hezbollah strongly supports, not just the Astana ceasefire, any ceasefire agreed upon in Syria,” Nasrallah said, in […]

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White House official attacks court after legal setbacks on immigration

A White House official on Sunday attacked a US court ruling that blocked President Donald Trump’s executive order on immigration as a “judicial usurpation of power” and said the administration was considering a range of options, including a new order. Sustained criticism of the judiciary from the White House comes amid concern among Democrats and legal scholars over Trump’s view of the constitutional principle of judicial independence as the administration seeks to overcome legal setbacks to its travel ban issued on 27 January. It has also become the backdrop against which US senators consider Trump’s Supreme Court nominee, Judge Neil Gorsuch, for a lifetime appointment to the nation’s highest court. Read: With the Muslim ban, Trump poses a threat to […]

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The Number 1 Reason Why Trump Is Good For Stocks

Via ConvergEx’s Nicholas Colas,

 The US equity market is very different than before Election Day 2016, and that’s not just because we are at fresh all-time highs.  There were plenty of new highs from 2013-2016, after all.  What’s different is the lack of sector and asset class correlation now versus 2009 – 2016.


Simply put, they are finally back to normal.  The drop in correlations among the 11 sectors of the S&P 500 has been profound, from 75-80% pre-Election to 57-62% afterwards.  This month’s reading of 57% points to the lasting nature of the change; this is a not blip.



The ramifications of this shift are: 1) lower S&P volatility (because, math) 2) getting sector bets right is now even more critical to outperformance and 3) it applies not only to domestic US equities, but to global managers who must allocate to EAFE and Emerging Market assets (correlations are structurally lower there as well).

It has been 94 days since the US Presidential election and Donald Trump’s surprise win.  In some ways it feels like yesterday, if only because it was not the expected outcome.  And in other ways, it feels like it was years ago.  Especially if you follow US equity markets, which have been remarkably quiescent.  If a modern day Rip Van Winkle went to sleep on November 7th, woke up today, and looked at a chart of the S&P 500 he might think “Oh, Hillary Clinton won…  And everything is status quo.  I am a little surprised US stocks rallied so hard, but there’s no volatility.  Yep – Hillary won.”

To see the effect of the Trump victory, you have to look at something other than price levels; you have to examine asset and sector price correlations.  We have been doing this monthly since 2009, and the story has been largely the same.  Correlations among the 10 (now 11) sectors of the S&P 500 have averaged 80-90%, and Emerging Markets and EAFE (Europe, Asia, Far East) equity markets have similarly tracked US equities.  This was known as ‘Risk On, Risk Off” for much of the post 2009 period of market history.  Everything goes up on the same days, and down on the same days.

Well, the world is very different now, and by a magnitude I would have thought impossible 95 days ago. We have attached some tables and charts to this note (click at the top for the PDF), but here is the highlight reel:

  • Average sector correlations to the S&P 500 were 57.1% last month. On the eve of the US elections, they were 66% and for the prior year they had ranged from 70-80%.  From 2009 – 2015, they were rarely below 80% and were +90% for 5 months straight in 2011. Since the election, sector correlations to the S&P 500 have been 56.8% (December), 61.2% (January) and that 57.1% reading we just mentioned.  Keep in mind that 50% is a good estimate for a pre-Crisis long run average, and we are basically there now after almost a decade of unusually high correlations.
  • The same observation holds for international equity markets. They have been tied at the hip to US stocks since the Financial Crisis as well, but now correlations for the EAFE country stocks to the S&P 500 are 61.4% and for Emerging Market equities it is 34.6%. The ramp down post-US election was a little slower.  Correlations last month were 74.3% (EAFE) and 55.1% (Emerging Markets).
  • The story in other asset classes is mixed. Precious metals (gold and silver) have been consistently in the low-correlation camp since 2009, and remain so today.  High yield corporate bonds are seeing higher correlations to US stocks in the past month (now 72.9%, but 62.5% last month and 54.7% the month before that).  High quality corporates and long dated Treasuries now sport (no surprise) a negative correlation to US stocks (-30.2% and -35.9%, respectively).

Since correlations were uniformly high before Election Day and now have reverted to much lower long term averages, we are going to chalk this up entirely to Donald Trump’s victory.  Nothing else is sufficiently different so as to explain it.  And as much as the recent spate of new highs is a welcomed development, we had new highs before the Election. The drop in correlations is really “New new”.

The big question is “OK, what does this mean?”  Three thoughts to wrap up this note:

Point #1: Lower correlations mean less price volatility in the S&P 500. That’s just math:  the lower the correlation between assets in a portfolio, the lower the overall volatility. That’s one reason why the CBOE VIX Index has been so low (along with realized volatility).  We’ll have to wait and see how much the sector correlations stay low when we get a systemic shock, but for now we can expect volatility to remain under pressure.


Point #2: Getting sector and stock bets right just got a whole lot more serious.  As correlations drift lower, different sectors will tend to show greater price and performance dispersion.  Use Health Care as an example.  Say you underweighted that group at the end of last year.  Big mistake: it is up 4.1% year to date, and only overweights in Tech (+5.9% YTD) and/or Consumer Discretionary (+4.8% YTD) would have saved you so far.  No other sector has better YTD performance than those three.


Point #3: The same goes for international equity portfolios.  Emerging markets are up 8.2% in dollar terms so far in 2017. EAFE is up 3.9% – more than the S&P 500’s 3.1% price return.

We will close with two reminders.

  • Next week is St Valentine’s Day (Tuesday). Make sure whatever you might be getting your significant other arrives on Monday, not Tuesday.  If you leave it up to UPS or FedEx or the local florist, your gift will arrive at 5pm.  You don’t want to leave your special someone hanging, do you?
  • The day after Valentine’s is the unofficial middle of the first quarter. The drop in correlations has put a lot of managers on the back foot. Just consider Financials – last quarter’s “It” sector has underperformed in Q1 (2.1% versus 3.1% for the S&P 500). Or Energy, last year’s big winner and with a lot of funds still overweight (down 3.3% YTD).

That’s the rough part about the sudden drop in correlation; being wrong just got a lot more expensive.  Underperforming groups like Energy and Financials are on a short leash as we transit the mid-quarter point. They both worked today, but they have a lot of ground to cover.  You might not see this turmoil on the market’s surface, but it is there.  And it will most likely get even choppier.

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