A historic handshake
|Donald Trump and Kim Jong Un prepare for their historic meeting, as the U.S. draws a firm line on what it will take for North Korea to receive sanctions relief. Here are some of the things people in markets are talking about.
Handshake to Open Trump-Kim Summit
Donald Trump plans to shake hands and have lunch with North Korean leader Kim Jong Un, kicking off a historic summit on Tuesday between two adversaries that only last year seemed on the brink of nuclear war. The summit represents a major gamble for each leader, with the elevated risk and potential reward the U.S. president favors. The meeting will be monitored, and dissected, around the globe for a sense of whether one of the world’s greatest national security threats, Kim’s nuclear arsenal, can be defused.
Denuclearization ‘Only Outcome,’ U.S. Says
The U.S. plans to keep sanctions in place until North Korea eliminates its nuclear weapons capability, yet is prepared to offer “unique” guarantees to ease the regime’s security concerns, Secretary of State Mike Pompeo said ahead of the summit. The top U.S. diplomat emphasized that complete, verifiable, irreversible denuclearization “is the only outcome that the United States will accept” from North Korea, sending a stern message to Pyongyang before Tuesday’s meeting in Singapore.
Expectations Low for Breakthrough
For diplomats and analysts familiar with Washington’s decades of pressuring a reclusive dictatorship to abandon its nuclear program, expectations of Tuesday’s meeting are low. Any outcome that avoids a return to the “fire and fury” threats of last year, and neither betrays allies nor prematurely eases sanctions, would be seen as a broad success. For Kim, the meeting will already be a unique achievement. His father and grandfather before him sought one-on-one summits with U.S. presidents, but neither succeeded. The summit will offer him a measure of legitimacy and international acceptance that will prove invaluable at home. The bar set by Trump and his team is much higher: to get the “complete, verifiable and irreversible dismantlement” that has eluded previous administrations, with a deal they’d view as tougher than the 2015 Joint Comprehensive Plan of Action with Iran. Trump withdrew from that multinational deal last month, arguing it was unacceptably weak.
China Plans Pipeline Behemoth
China’s push to eradicate smog by using more natural gas is set for a boost. Beijing is pushing ahead with a plan to merge under one company a national pipeline network that would unify transport and investment decisions. Regulators aim to announce a decision before winter to combine oil and gas pipeline assets owned by the nation’s three state energy giants, worth as much as 500 billion yuan ($78 billion), under a new national operator, according to people with knowledge of the matter. The move, under discussion since at least 2014, would reinforce President Xi Jinping’s commitment to overhaul state-owned enterprises and streamline industrial capacity. It would also be a boon for efforts to use more natural gas, instead of coal, to cut pollution. That endeavor has been hampered at times by a lack of infrastructure.
What to Expect From Fed, ECB
Meetings of the Federal Reserve and the European Central Bank this week are likely to show a continued, gradual move away from the policy approach they adopted to contain the trauma of the global financial crisis from 2010 to 2017, Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, says. Yet the two institutions are making this shift at different speeds, and that difference could become more pronounced, raising interesting questions for markets. El-Erian expects the Fed to increase interest rates by a quarter of a percentage point, keep open the possibility that the next hike could come as early as September (rather than December), maintain the baseline of a total of three increases for 2018, and suggest that the balance of risks is tilted toward four boosts. Policy makers will also reaffirm the plan for reducing the balance sheet and refrain from major changes to the dot plot, El-Erian says.
What we’ve been reading
This is what caught our eye over the last 24 hours.
And finally, here’s what David’s interested in this morning
Today’s going to be nuts. Expect a lot more headlines. Expect a lot more emotion. Expect to witness scenes that were frankly inconceivable as recently as early this year. Expect markets to scare easily but also don’t be surprised if investors are on the lookout to be impressed. And by virtue of all of the above, also expect a lot more opportunities for things to get mispriced. Think Murphy’s Law, sort of. There’s frankly nothing tangible the two sides can both commit to and deliver today that materially changes the already positive posture of each side. On the other hand, even the slightest deviation will put the spotlight on the divide between what the Americans want and what North Korea can deliver. Now having said all that, there could be a couple of moments today that take our collective breath away. Trump and Kim meet in the middle. They shake hands. Maybe even an awkward hug. Invites to visit may get exchanged. Someone may commit to doing something. The other might reciprocate, etc.
Not to be the bear here, but chances are it’s during those moments of exuberance and emotion when things could end up getting mispriced, if they haven’t already. Korean bond risk is near a decade low. Implied volatility on Korean assets has picked up in recent days but remains historically low. Anyway, it’s already been unusual since the weekend and it’s about to get stranger today. Follow this historic day online, on Bloomberg TV, on Bloomberg Radio, and on TicToc on Twitter. Take our hand. Here we go.