Financial Markets and Artificial Intelligence (AI)

Now, financial markets are not likely to care too much about the developing “Korean Situation.” The impact of geopolitics on markets is still limited because investors do not price in extreme “tail risks” yet.

Humans are genetically programmed to be optimistic about life and investors are still “most of the time” human, not, let’s say robots.

Now, please take care. Investors that react as pure humans to so-called tail risks could become less and less the case because of the venue of Artificial Intelligence (AI) into our lives, notwithstanding we should expect that only to happen at a relatively “still” slow progressing pace.

I personally have no doubt that “Change Is Coming” because of “AI” where professionals and those who have the means to use it will come first.

Of course, “We aren’t there yet.”

The North Korea situation

Hopes for a summit between North Korea’s President Kim and President Trump seem to be fading somewhat, to say it mildly.

When yesterday, in the Oval Office where President Trump met with South Korean President Moon and the planned U.S.-North Korea summit in Singapore on June 12 between the North Korean President Kim and President Trump was questioned about by reporters, Mr. Trump answered: “There’s a chance, a very substantial chance, it won’t work out. I don’t want to waste a lot of time and I’m sure he (President Kim) doesn’t want to waste a lot of time. So, there’s a very substantial chance it won’t work out and that’s OK. That doesn’t mean it won’t work out over a period of time.”

The North Koreans seem to have very different ideas from the Americans to what a summit might achieve.

It might be helpful to recall that North Korea threatened to cancel the Singapore summit last week, citing remarks by U.S. National Security Adviser John Bolton who said the regime could follow a “Libya model” of arms control when after Libyan dictator Muammar Qaddafi had decided in 2011 to give up his weapons of mass destruction in exchange for an easing of sanctions and afterwards Muammar Qaddafi was liquidated by NATO-backed rebels, which clearly doesn’t give the North Koreans any assurance at all whatever President Trump promises under today’s circumstances.

In fact, the whole situation comes down to what has been the sticking point between Washington and Pyongyang and which remains what it has been for years: What does “denuclearization” mean and “how” is it carried out?

Emerging Markets and the Turkish lira

Among the Emerging Economies’ currencies, it all looks right now that the Turkish lira is heading for a full-blown currency crisis.

This morning, the Turkish lira suffered its biggest loss in almost a decade as confidence in the Turkish central bank’s willingness to halt its slide all but evaporated. At noon in Istanbul today it was 4,1 percent lower after having sank as much as 5.2 percent earlier.

Investors should keep in mind that there’s no limit to how far this could go once the Turks themselves will also start selling their liras.

Of course, the currency moves of the Turkish lira remains being of more interest for the Turkish central bank because here currency moves do coincide with a change in prices across a broad range of goods and services. The lira has lost 17 percent of its value versus the dollar this month alone.

The accelerated decline of the Turkish currency coincides with President Erdogan suggesting increased political control of the Turkish central bank. Erdogan, is also convinced that lower interest rates “might” mean lower inflation.

President Erdogan’s refreshingly original interpretation of the role of monetary policy and inflation in an economy has not encouraged international capital inflows to date.

If Turkey cannot persuade international investors to come into Turkey at the current exchange rate, the Turkish lira will continue to weaken further.

Investors should also watch out for “contagion” to other weak EM currencies like for example the Argentine peso.

Federal Reserve

The exciting news should come later today from the United States when the Federal Reserve minutes of the May 1-2 Fed policy meeting will be released.

The idea of a steady quarter point a quarter rate hike cycle is relatively clearly established in the minds of economists. The details in the minutes should be important.

We’ll see what we hopefully can learn.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.