Hostilities may spook foreign fund inflows

The local financial market tumbled yesterday after the attack by North Korea. Market experts believe foreign investors could possibly flee the South Korean market if relations with the North worsens.

The news of North Korea’s firing of artillery shells at Yeonpyeong Island sent the won surging by more than 40 won to 1,180 won against the U.S. dollar in the offshore nondelivery forwards market.

Also, the three-year bond futures slipped the most since Nov. 5 by 0.2 percent to 112.05, while the Kospi 200 December futures index ended down 2.44 percent, or 6.20 points, at 248 yesterday. Foreign net selling significantly grew in the Kospi 200 futures market as news of the North’s attack broke yesterday afternoon.

But the incident did not have much of an impact on the local stock market because the attack broke out when it was about to close.

“There is a high possibility that the local market will open at a low level today,” said Park Hee-chan, a researcher at Mirae Asset Securities, adding that it is too early to judge the level of shock in the domestic finance sector.

“We have to watch more, but a nuclear test and the firing of missiles would be totally different,” said Han Bum-ho, an analyst at Shinhan Investment Corp. “If conditions are judged to be serious, foreigners may flee away from the domestic market.”

Meanwhile, a report by Reuters on a rumor about the death of North Korean leader Kim Jong-il triggered even more chaotic conditions in the finance market. Such a rumor was first reported by Singapore-based finance magazine IFR and was also seen in several foreign online trading Web sites such as ForexLive.com and Forexcrunch.com. The rumor, which could not be confirmed, has driven foreign investors away from the domestic market, damaging foreign investors’ sentiment, according to market analysts.

The Ministry of Strategy and Finance and the Financial Services Commission plan to hold a meeting this morning to discuss current economic conditions and to come up with countermeasures against the North’s provocative action during a meeting at the Federation of Banks in central Seoul.

The Bank of Korea already held a meeting to discuss monetary countermeasures against the attack yesterday. “The local market was closed [when the news broke out], but we have to keep an eye on offshore foreign exchange markets and foreign investment trends and discuss countermeasures, taking the current conditions into account,” said a BOK official.

Financial authorities plan to operate a 24-hour emergency situation room to monitor the domestic market.

“We will preemptively implement emergency plans according to future finance market conditions,” said an FSC official.

By Jung Jae-yoon [jyj222@joongang.co.kr]