Wednesday, 5th July

By Alan Murray and Geoffrey Smith
July 5, 2017
July 05, 2017

Good morning,

Stock markets are shrugging off the latest escalation of tensions with North Korea. Asian Pacific shares are up this morning, regaining half the losses they suffered yesterday after North Korea launched its missile test. But at the risk of arguing with the crowd, I think there’s more here than the markets are signaling. This is a dangerous game at an unstable moment.

On one side is President Trump. The U.S. Defense Department has confirmed that the missile fired Tuesday, on the eve of the July 4th holiday, was indeed an ICBM, and some experts believe it had the potential to reach Alaska and perhaps parts of the mainland U.S. That means North Korea now has achieved what President Trump tweeted in January “won’t happen.” The Trump tweet wasn’t exactly a line in the sand, but you can bet the President recognizes that he now faces the most serious foreign policy test of his presidency.

On the other side is Kim Jong Un – a man whom Western analysts alternately describe as both crazy and wily. He left no doubts about the game he was playing. The state KCNA news agency said this morning that Kim, “with a broad smile on his face” told officials, scientists and technicians to continue to send “packages of gifts” to the U.S.,” and noted that it came as Americans celebrated their Independence Day.

The U.S. and South Korea responded by firing deep strike missiles into South Korean waters as a “show of solidarity.” And at the request of U.S., South Korean and Japanese governments, the United Nations Security Council scheduled a meeting for later today to consider, in the words of Secretary of State Rex Tillerson, “stronger measures to hold the DPRK accountable.”

The U.S. options for responding are complicated, as this story by David Sanger in the New York Times nicely explains. But this one bears close watching.

News below.

Alan Murray
@alansmurray
alan.murray@timeinc.com

 


Top News

Korea, Hacking Loom Over Trump-Putin Meeting

President Trump will meet Russia’s Vladimir Putin on July 7, on the sidelines of a two-day summit meeting of G-20 leaders. The White House says there is “no specific agenda,” although it can be assumed that the issues of election hacking and North Korean missile testing may get an airing. Putin and Xi Jinping signaled at a meeting of their own Tuesday that they would resist further U.S. pressure against the rogue state unless the U.S. agreed to stop its annual military drills in South Korea and withdraw the THAAD missile defense system from the peninsula – a system that they fear is aimed as much against them as against Pyongyang. Fortune

The EU and Japan Try to Set an Example

As often happens ahead of G20 summits, international diplomacy is hotting up. Japan and the EU are trying to finalize the details of a trade liberalization deal, as a pointed rebuke to the new U.S. policy drift where the threat of import tariffs on steel and aluminum products is looming large. Angela Merkel lashed out at “delusions” of protectionism and isolationism in a speech at the weekend, without feeling the need to say who exactly she was talking about. One leader sure to get some interesting questions in Hamburg will be Saudi Arabia’s King Salman, who may be asked to explain the Gulf-wide, Saudi-led blockade policy on Qatar. An ultimatum to Qatar threatening further sanctions expired overnight. Reuters

JP Morgan Makes a Move on WorldPay

Less than a week after the Fed cleared U.S. banks to return billions of dollars in surplus capital to shareholders, JP Morgan decided it had something better in mind. It’s made a preliminary approach to U.K.-based payments company Worldpay. The market is anticipating a bidding war, as credit card processor Vantiv has done the same, and there are suspicions that others, such as Global Payments or France’s Ingenico may also join in. It would be Jamie Dimon’s biggest deal since Washington Mutual in 2008, and a very clear way of saying that investing in growth is now a bigger priority than managing “too-big-to-fail” risks. Fortune

Quantitative Tightening Due in September

The Federal Reserve will likely announce within two months its plans for unwinding the trillions of dollars of bond purchases it made with its post-crisis “quantitative easing” policy, according to The Wall Street Journal. Shrinking the balance sheet is easier to agree on than timing the next interest rate hike, given that the inflation rate remain stubbornly low and given pockets of weakness in both the housing and auto sectors amid an otherwise well-performing economy. The Fed doesn’t plan on actively selling bonds back into the market, but rather on not reinvesting the money it gets back when the bonds it holds mature. A gentle start in September will allow it time to see how the markets react before committing to a third rate hike in December, the WSJ’s reasoning goes. The minutes from the last Fed policy meeting are due this afternoon. WSJ, subscription required

 



Around the Water Cooler

Volvo To Go All-Electric by 2019

Volvo, the Swedish carmaker now owned by China’s Geely, said it will abandon the conventional combustion engine by 2019. From that date, all the cars it sells will either be powered by hybrid or fully electric motors. It’s the first legacy automaker of size to make that commitment. The decision is a calculated gamble on a fast-evolving shift in public opinion and regulatory priorities over air quality in Europe, Volvo’s largest market. It comes as Volvo enjoys its best spell in years. Its global sales grew 6% last year and profit rose 67%, as it made inroads into the U.S. market in particular. Fortune

Sure, Sure. What’s Another €5.4 Billion?

The slowmotion train-wreck that is Italy’s banking system rumbled through another junction Tuesday, as the EU approved a 5.4 billion euro bailout of Monte dei Paschi di Siena, the biggest and most problematic of the country’s problem banks. As with the twin bailouts of two regional banks in June, the EU’s new rules are being bent to avoid the awkwardness of bailing in creditors. While it doesn’t explicitly violate the EU’s fiscal rules, it also pushes Italy, with a debt/GDP ratio already over 133%, a little further down the line to a state insolvency that will, eventually, be the ultimate test of the Eurozone. The bank’s management Wednesday solemnly promised 1.2 billion euros in profit…by 2021. Reuters

A Reading From the Book of True Religion, Chapter 11…

Denim specialist True Religion filed for Chapter 11 bankruptcy protection, the latest victim of the great consumer migration away from brick-and-mortar stores to online shopping. The company estimated its liabilities at up to $500 million. It has secured debtor-in-possession financing from Citizens Bank for up to $60 million and signed a restructuring agreement with its lenders that will cut its debt burden by around $350 million. Reuters

Laptop Ban Relaxed on Middle Eastern Hubs

The U.S. lifted its ban on laptops on inbound flights operated by Dubai-based Emirates Airline and Turkish Airlines, after the airport hubs they use fell into line with Department of Homeland Security guidelines on installing scanners capable of detecting explosives. The government had already lifted the ban on laptops for Abu Dhabi-based Etihad at the weekend. ABC

Summaries by Geoffrey Smith Geoffrey.smith@fortune.com;

@geoffreytsmith

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