On Thursday evening (08/03) Washington time, South Korea's national security adviser Chung Eui-yong announced - at the White House - that North Korea's belligerent leader Kim Jong Un invited US President Donald Trump for talks. Trump accepted the invitation and both parties are expected to meet by May 2018. It would be an unprecedented move as a sitting US president has never met a North Korean leader.
This agreement comes after several days of negotiations between North Korea and the United States. Kim Jong Un reportedly promised to halt all nuclear and missile tests ahead of the meeting and said it is willing to denuclearize its country provided the nation's security can be guaranteed.
It is now being speculated in media what the exact motive is behind North Korea's invitation to Trump. Did the far-reaching sanctions (imposed by the international community after the series of missile tests in late 2017) hit North Korea so hard that it needed to walk a diplomatic path? Or, is North Korea seeking some extra time by faking to agree to denuclearization while actually it is secretly completing its nuclear program? Or, is North Korea seeking to "legitimize" its regime in the eyes of its own population by organizing a meeting with the leader of the world's biggest economy?
Although the news has a positive impact on markets on Friday morning (09/03), particularly on South Korean assets, there is plenty of reason to remain skeptical about North Korea's true intentions. In the past, North Korea has also seemingly been committed to break down its nuclear program but it was simply an effort to extort economic aid and agreements turned out to be empty promises. Therefore, analysts advise Trump to put in place even heavier sanctions ahead of the meeting.
Another interesting topic is the exact location for the Trump-Kim meeting. No details have been released yet (and quite likely the location has not been agreed upon yet), but some say Beijing (China) would be a strategic location.
For Trump, the latest breaking news means a shift of attention from the departure of Gary Cohn as his top adviser and rising concerns about a global trade war to the North Korea denuclearization issue.
Asian stock markets are in the green zone after the breaking news in early Friday morning. Hence, Indonesia stocks are expected to follow suit after the market opens at 09:00 am local Jakarta time. Yesterday, Indonesia's benchmark Jakarta Composite Index rebounded 1.17 percent as fears of a global trade war eased after Trump stated that some trade partners may be exempted from the proposed tariffs. In fact, all countries are invited to negotiate.
However, there are still several issues that ignite negative market sentiments:
Negative Domestic Factors:
• Several big listed companies on the Indonesia Stock Exchange reported bleak corporate earnings over FY-2017, most notably HM Sampoerna (cigarettes) and Unilever Indonesia (personal care products). This shows household consumption remained bleak in Indonesia.
• The Consumer Confidence Index of Indonesia fell to 122.5 points in February 2018 (below the estimate of 124.0), down from 126.1 in the preceding month
• Foreign investors continue to sell more Indonesian stocks than they buy. So far in 2018, foreign investors recorded a "net sell" of IDR 13.5 trillion (approx. USD $978 million)
• Indonesian President Joko Widodo signed the DMO price regulation, implying local coal miners will be forced to sell part of their production at home (to power plants) for a cheap price
• The Indonesian government said it will not raise prices of subsidized fuels and electricity until late-2019. This is obviously a move influenced by political motives as the legislative and presidential elections are planned for mid-2019. Raising fuel and electricity prices would undermine popular support in the government. But it does mean the government will require more funds for its energy subsidy budget
Negative External Factors:
• The Federal Reserve is expected to raise its benchmark interest rate at its March 2018 policy meeting. Investors are still waiting for US non-farm payrolls and employment data due later today (but these data are expected to be strong)
• The departure of Gary Cohn raises concerns about the outbreak of a global trade war as Trump is expected to go-ahead with its import tariffs on steel and aluminum. The European Union and China have already stated that they are ready to impose retaliatory tariffs.
• Although the European Central Bank (ECB) opted to leave interest rates unchanged and continue its asset purchase program until September 2018, analysts hold very different views regarding the future of the ECB's quantitative easing program.