Where to start?

North Korea’s nuclear test drew criticism from President Donald Trump, who posted a series of tweets:

• “North Korea has conducted a major Nuclear Test. Their words and actions continue to be very hostile and dangerous to the United States.....” 6:30 AM - 3 Sep 2017
• ..North Korea is a rogue nation which has become a great threat and embarrassment to China, which is trying to help but with little success. 6:39 AM - Sep 3, 2017
• South Korea is finding, as I have told them, that their talk of appeasement with North Korea will not work, they only understand one thing! 6:46 AM - Sep 3, 2017

North Korea has conducted a major Nuclear Test. Their words and actions continue to be very hostile and dangerous to the United States.....

— Donald J. Trump (@realDonaldTrump) September 3, 2017

..North Korea is a rogue nation which has become a great threat and embarrassment to China, which is trying to help but with little success.

— Donald J. Trump (@realDonaldTrump) September 3, 2017

South Korea is finding, as I have told them, that their talk of appeasement with North Korea will not work, they only understand one thing!

— Donald J. Trump (@realDonaldTrump) September 3, 2017

In the meantime, and only one day after North Korea’s latest nuclear test, it appears it is making preparations to launch a ballistic missile, according to a South Korean official.

In other news, the weekend saw media reports that Trump is seriously considering withdrawing from the U.S.-Korea Free Trade Agreement (KORUS).

Maybe for investors it’s good to keep in mind that the U.S. President can tear up such trade deals without reference to Congress.

Of course, behavioral economics teaches us that signaling effects are much more important than many think. It is not necessarily the action, but the signal that the action sends that is important. This might be relevant to the current situation.

The Korean won has weakened a bit, but not much on the news. The currency is well within ranges seen since February.

Asian equities are down, but not so that one would really notice. It would take the most sensationalist of media filter to see this as a strong reaction.

Why is this? Well, because behavioral economics teaches us that humans are genetically programed to be optimistic.

Investors, or maybe better said, most investors are human.

The extreme tail risks of this present situation will be given little or even no weight because humanity just does not think that way. A more realistic reaction and, take care, one that might come through is for markets to price in the increased trade protectionism from the United States. Trump has indicated that wider trade sanctions might be a policy option and media reports suggest that the President is keen to pursue tariffs against China, almost regardless of what deals may be on offer.

The Wall Street Journal reported that the administration is considering invoking a little-used provision of U.S. trade law to investigate whether China’s intellectual-property policies constitute “unfair trade practices.”

That combination gives a non-tail risk that investors might like to price in.

I simple words we could say: “A protectionist bombshell seems more plausible than a nuclear bombshell.”

With American markets closed for the Labor Day holiday, it falls to Europe to provide today’s data flow. This is somewhat overshadowed by Thursday’s communique of the ECB Governing Council on the prospects of the ECB’s monetary policy, which, of course, will include its forward guidance that should be verbally commented (hopefully) by the ECB President Maria Draghi at the press conference that will follow the communique after the monetary policy decisions remained at “status quo’ at the latest meeting on July 20.

Markets are looking for information on the tapering of the ECB’s quantitative policy, although the European Central Bank (ECB) seems unlikely to provide too much detail on this point in time.

Whether there will be mention of the euro currency is of some interest. The level of the euro is hardly economically concerning. On almost any metric, the euro still seems undervalued, but the speed of the euro’s appreciation, which has risen since January 1st against the dollar +13 percent is something that may also cause concern.

For the ECB to say nothing on Thursday is potentially as interventionist as saying something, as neglect would be seen as a signal of acceptance.

Today we got producer price inflation (PPI) data from the euro area that again failed to show any growth. Prices remained flat at their level in June and annual PPI inflation decelerated for a third consecutive month to 2.0 percent, its weakest mark for the year.

Annual core PPI inflation has now fallen to 0.5 percent and reduces the likelihood of any QE tapering announcement by the ECB on Thursday.

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