South Korean stocks and the won extended losses on a report yesterday that North Korea might be preparing to launch an intercontinental ballistic missile (ICBM) after saying the day before that it tested a hydrogen bomb.
The KOSPI closed down 1.2 percent, the won weakened 0.9 percent against the US dollar and the yield on the benchmark 10-year government bonds rose 4 basis points to 2.31 percent.
The benchmark share gauge, which dropped as much as 1.7 percent in the morning, had pared much of that loss before the ICBM report.
Sunday’s nuclear test was the first since US President Donald Trump took office, and he threatened to increase economic sanctions and halt trade with any nation doing business with North Korea in response.
While markets in Seoul have typically sold off in the immediate aftermath of provocations from North Korean leader Kim Jong-un’s regime, they have also been quick to recover — the KOSPI sank as much as 1.6 percent on Tuesday last week after the launching of a missile over Japan, then reversed almost all those losses by the close.
Chang Kyung-soo, acting chief of the South Korean Ministry of National Defense’s policy planning office, yesterday told lawmakers that North Korea was making preparations for a missile launch, but did not give a time frame.
South Korea sees a chance that North Korea will fire an ICBM into the Pacific Ocean, Yonhap News reported.
“The risk from North Korea could be different from the past, as the regime has now reached close to the ‘red line’ by [the] US,” said Lawrence Kim, an analyst at NH Investment & Securities Co in Seoul. “The reaction from US and China will be key.”
The cost of insuring five-year South Korean sovereign bonds from non-payment rose by 2 basis points to 63.5 yesterday morning, according to prices from Australia & New Zealand Banking Group Ltd.
North Korea has conducted more than a dozen missile tests this year, including several ICBMs, leading to a war of words last month between Trump and Pyongyang that has rattled global markets.
The South Korean government said the impact of North Korea’s sixth nuclear test could spread from financial markets to the real economy.
North Korea’s latest action also dented risk appetite across the region, with Japan’s TOPIX falling 1 percent and September contracts for futures on the S&P 500 Index dropping 0.5 percent. The yen strengthened 0.7 percent to ¥109.44 per US dollar on haven demand.
Not everyone was pessimistic about the outlook for the overall market.
Overseas investors yesterday bought a net US$3.8 million of South Korean equities, according to Bloomberg data using official figures.
“Underlying sentiment toward emerging markets remains strong and as long as an actual attack is avoided on the Korean Peninsula, the impact from North Korea’s latest nuclear test should be short-lived,” said Masakatsu Fukaya, an emerging markets foreign-exchange trader at Mizuho Bank Ltd in Tokyo. “The extent of the market impact will depend on the reactions from the US and other countries.”
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