Asia market jitters on North-South Korea tensions start to wane

24 November 2010 06:02  [Source: ICIS news]

By Pearl Bantillo and Nurluqman Suratman

South and Norh Korea exchange fireSINGAPORE (ICIS)--Heightened geopolitical tensions in northeast (NE) Asia following a skirmish between North and South Korea weighed down on some regional stock markets on Wednesday, but the negative sentiment may soon wear away.

In late morning trade, South Korea’s KOSPI Composite Index slipped 3.72 points or 0.19% at 1,925.22.

Japan, which was on holiday on Tuesday, had a belated reaction to the Korea tensions, with the Nikkei 225 falling as much as 1.5% in early trade on Wednesday. But it pared its losses to 0.72% at 10,045.08 as of 11:38 hours Japan time (02:38 hours GMT).

Stock market indices in southeast Asia, meanwhile, appeared to have shrugged off the issue as the Korean tensions were not expected to escalate into an all-out war.

In Singapore, the benchmark Straits Times Index was up 15.44 points or 0.5% at 3,141.745 at the close of morning trade.

The Hang Seng Index in Hong Kong rose 158.47 points or 0.69% to 23,054.61, while the SSE Composite Index in Shanghai edged up 13.49 points 0.48% to 2,842.10.

"An outbreak of a war is not expected by political analysts, as North Korea understands its limits and South Korea usually also adopts a careful approach," said DBS Bank in a research note.

North Korea fired dozens of artillery shells that hit South Korea’s Yeonpyaong island, killing two soldiers and setting houses ablaze, according to media reports. South Korea fired back on what it considered as a military provocation.

“It’s clearly serious because they [North Korea] are attacking a South Korean territory this time round, but the majority believes that the North would not push forward further,” said Sonia Song, a regional analyst at HSBC Global Research in Hong Kong.

“It is a temporary hiccup,” Song added.

South Korea’s Ministry of Strategy and Finance (MOSF) issued a statement late on Tuesday, saying that increased volatility in the financial and foreign exchange markets may happen “in the short run”.

“But Korea will recover from it in a short period as it did before when faced with similar geopolitical risks,” it stated.

The South Korean financial markets would be subject to strong pressures broadly, DBS Bank said, citing the significant increases in foreign holdings in equity and debt securities.

In the September quarter, foreign holdings in South Korean equities grew to $5.1bn from $2.7bn in the June quarter, while the share of foreign holdings in debt securities increased to $7.7bn from $6.1bn over the same period, according to the Singapore-based bank.

“This trend of rising foreign capital inflows is likely to pause/reverse for now because of risk aversion,” DBS Bank said.

But the country’s economic fundamentals should be able to withstand any temporary capital outflows, it said.

South Korea’s external position has also improved significantly since the recovery from the 2008 crisis and the capability of countering capital outflows has strengthened,” DBS Bank said.

The MOSF said that with South Korea’s “solid fiscal situation and large foreign exchange reserves, the provocation [by North Korea] will have limited influence on the Korean economy”.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections
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By: Pearl Bantillo
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