Markets find feet as shock recedes

Electronic boards at Korea Exchange Bank’s headquarters in Myeong-dong, central Seoul, yesterday show the stock and currency markets stabilizing one day after North Korean leader Kim Jong-il’s death was announced. [YONHAP]

Local financial markets regained some ground yesterday as the immediate shock of increased risk from North Korea appeared to dissipate early.

Stocks showed limited gains across the board, while the local currency also rose against the U.S. dollar. The spread on Korean government bonds also fell slightly after recording the highest climb ever related to spiking geopolitical risk on Monday, when Kim Jong-il’s unexpected death was announced.

As global investment banks continued to point to the power transfer in the North as a major variable in the external perception of the South’s economic and financial stability, local analysts and government officials suggested that the euro zone debt crisis posed a greater short-term threat to markets than the fleeting impact of Kim Jong-il’s death.

While confirming that yesterday’s market reaction to Kim’s demise was “limited,” government officials rolled out cooperative measures to contain any public panic or detect any abnormal movements in financial markets should they materialize.

Yesterday, the benchmark Kospi rose 16.13 points or 0.91 percent from Monday’s close to reach 1,793.06 by the end of trading.

Despite global stock markets, including New York, seeing declines overnight due to news that the European Central Bank will not expand its buying of European government bonds, the primary index rose as investors went bargain hunting.

Retail and institutional investors snapped up 168 billion won ($145 million) and 60.5 billion won in shares, respectively, while foreign investors continued to exit the local bourse by selling 330 billion won in stocks.

Meanwhile, the won ended at 1,162.2 won against the greenback, up 12.6 won from Monday’s close.

“The government showed its strong intention of keeping markets stable. This, coupled with a rebound in the local stock market, worked to bring the won’s value back up,” said a foreign-currency dealer at a commercial bank.

With past instances of a sudden emergence of North Korean risk having had similar short-lived impacts, analysts and government officials noted that financial markets seem to have already shrugged off the shock of Monday’s announcement.

“The spread on credit default swaps fell 4 basis points [from Monday] and the nondeliverable forwards market remained roughly the same as at the previous day’s close,” said Vice Minister of Strategy and Finance Shin Je-yoon at a joint emergency meeting of financial authorities yesterday morning. “Considering banks’ foreign currency liquidity, foreign funds are also satisfactory.”

However, global investment banks and top officials at domestic financial companies reiterated that the precarious succession of the North Korean regime’s leadership left long-term outlooks uncertain.

“[Monday’s] drop in stock prices, as well as the fall in both the value of the won and bond prices, was smaller than previously estimated,” Hana Financial Group Chairman Kim Seung-yu told the JoongAng Ilbo.

“However as of now, predictions are difficult to make. The situation will probably have to be observed carefully for the next two to three months.”

Government authorities said they will operate six task forces to oversee the flow of financial markets, exports, exchange rates, foreign currency reserves, inflation and the distribution of necessities. They will also increase interdepartmental and international cooperation to root out any abnormal market conditions, they said.

“We will monitor the situation and pursue measures to stabilize supply and demand as well as establish a sense of order in terms of retail distribution if needed to minimize the disruption to regular people’s lives,” said Shin.

“Any moves that disturb the market, such as stockpiling or cutting back yields, will be met with strict crackdowns.”

By Lee Jung-yoon [joyce@joongang.co.kr]