North Korea tensions 'remain contained,' Nomura analysts say

Key Points
  • North Korea fired a ballistic missile over Japan, reigniting a global risk-off trade on worries about the growing nuclear threat.
  • However, Nomura analysts say tensions around North Korea remain contained.
  • They cited the lack of signals from U.S. military action and Nomura's in-house geopolitical consultant, who last week lowered the chance of war on the Korean peninsula to 35 percent from nearly 50 percent.
Pedestrians walk past a TV set showing news about North Korea's missile launch in Tokyo, Japan, August 29, 2017.
Kim Kyung-Hoon | Reuters

Tokyo-based Nomura said it expects the North Korea tensions to stay controlled, even after the rogue state on Tuesday fired a missile over Japan.

"We see today's provocation as in line with our base case for the [Korean] peninsula — that
tension will remain elevated for some time, but also remain contained," a team of Nomura research analysts said in a Tuesday note led by Hong Kong-based economist Minoru Nogimori.

The analysts cited a Friday report from Alastair Newton, co-founder and director of Nomura geopolitical consultant Alavan Business Advisory, that lowered the probability of war breaking out on the Korean peninsula to about 35 percent from nearly 50 percent.

Number of North Korean provocations

Source: Arms Control Association, Nomura Global Economics

Although Newton said the probability will "almost certainly" fluctuate, none of Nomura's three early warning signals of potential U.S. military action have yet appeared this year.

The signals are: a U.S. government evacuation order to U.S. citizens in South Korea, a large scale U.S. military build-up near the Korean peninsula resembling 1994, and a ramp-up of the U.S. defense readiness condition to level three from level four, the Nomura report said.

Early Tuesday morning local time, or late Monday Eastern time, North Korea fired a ballistic missile that flew for about 2,700 kilometers (1,678 miles), a South Korean military official told NBC News. Japanese Prime Minister Shinzo Abe called the action an unprecedented, serious and significant threat, and President Donald Trump said "all options are on the table" in response to the missile firing.

The missile launch coincided with regular joint military exercises by the U.S. and South Korea.

Hua Chunying, spokeswoman for China's Ministry of Foreign Affairs, questioned in a briefing the effectiveness of the exercises and called for "restraint" and dialogue.

News of the missile firing sent global stocks mostly lower and gold higher as investors sold risky assets and turned to safe-haven trades.

The South Korean won fell nearly 0.9 percent against the U.S. dollar, to 1,128 won overnight and was last trading near 1,124 won, according to FactSet.

The iShares MSCI South Korea Capped ETF (EWY), which counts Samsung Electronics and Hyundai Motor among its largest holdings, traded more than 1 percent lower Tuesday morning. EWY is up 28 percent so far this year.

That said, the North Korea nuclear threat is growing more serious.

"Tensions between North Korea and the US have, in our view, reached levels unseen since 1994, when the Clinton administration considered air strikes on North Korea's main nuclear facility at Yongbyon," the Nomura analysts said.

The analysts expect South Korea's economy gross domestic product to grow 2.3 percent in 2018, slightly below the consensus 2.6 percent. Nomura also forecast the South Korean won to weaken about 1.4 percent to 1,140 won versus the U.S. dollar by the end of 2018.