Will the North Korea risk hold?

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Will the North Korea risk hold?

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Finance Minister Kim Dong-yeon, center, speaks at a meeting on economic issues with other government ministers on Monday in Seoul. [YONHAP]

The Korean stock market seems to have weathered the war of words between U.S. President Donald Trump and North Korea’s Kim Jong-un, rebounding on Monday from a near weeklong slump, but investors are still shaky about whether Seoul’s main bourse is truly in the clear.

The benchmark index, the Kospi, ended 0.63 percent higher than Friday’s close at 2,334.22, but the gains were largely led by institutions as foreign investors continued their dumping. They have been net sellers for four consecutive trading days ever since Trump threatened North Korea last week with “fire and fury” and North Korea responded with assurances of an attack on U.S. strategic assets in Guam.

Kim Dong-yeon, South Korea’s finance minister, said during a meeting on economic issues with other government ministers on Monday in Seoul that the South Korean government would remain alert, especially if geopolitical tensions escalate beyond the level of previous provocations.

“The influence on the financial and foreign exchange market is different from the past as it is becoming a global anxiety,” Kim said. “Even on the smallest impact, there’s a possibility that the volatility could expand exceptionally.”

Kim plans to meet with the central bank’s governor, Lee Ju-yeol, on Wednesday to discuss the risk from North Korea and measures that will help stabilize the market.

Although the stock markets in Shanghai and Hong Kong also recovered on Monday, the volley of bellicose statements between North Korea and Trump has increased volatility in the global market. Tensions were so high last week that the Chicago Board Options Exchange Volatility Index, also known as the “fear index,” rose 44 percent in just a single day on Thursday to close at its highest level since the U.S. presidential election on Nov. 8 last year. Last week, the Shanghai index fell 2.2 percent after Trump’s Aug. 8 statements, while the French market fell 3 percent and the U.K. market was down 1.9 percent.

The U.S. market rebounded on Friday, but it was because the market was betting that the U.S. Federal Reserve would postpone raising its interest rates due to slower-than-expected inflation growth last month.

In the case of the Japanese stock market, the Nikkei 225 continued to fall on Monday, stretching its losing streak to a fourth session.

The most affected index has undoubtedly been Seoul’s Kospi, which saw a record-breaking run come to a halt. On Friday, the market closed down 1.7 percent compared to Thursday after foreign investors sold 649.8 billion won ($569.9 million) worth of stocks. It was the largest dump by foreign investors in nearly two years. The last time they sold that much in a single day was on Aug. 24, 2015, when they sold 723.9 billion won worth of stocks.

In the past four trading days since Trump’s comments against Pyongyang, the Kospi dropped 3.1 percent while foreign investors offloaded 1 trillion won worth of stocks. The situation also drove up Korea’s credit default swap premiums, which rose to its highest in a year and a half to nearly 0.07 percent. The premium is used in evaluating the sovereign risk of a country.

Oh Tae-dong, an analyst at NH Investment & Securities, predicts the risk from North Korea will not last long. “If the United States were to take military action, it would take actions that protect U.S. citizens within Korea,” he said. “But we haven’t seen any signs that show such actions are being taken. Additionally, North Korea, other than condemning the United States, has not made any preparations for war.”

Park Sang-hyun of Hi Investment & Securities analyst said China’s role will be significant in bringing back confidence in the market. “The tensions will be eased when a dialogue channel is established between the two countries with active mediation from China.”

Considering China’s own security interest in the region, analysts are confident that it will not idly stand by and will likely intervene. And on Friday, Trump himself mentioned he was willing to find a peaceful solution during a press conference in New Jersey. “Hopefully, it will all work out,” he said. “Nobody loves a peaceful solution better then President Trump.”

However, the president left some room for ambiguity when asked about what he meant by bad solutions and whether that meant a war with North Korea. “You know the answer to that,” he said.

The market is expecting to remain volatile for the time being especially with a 10-day joint military exercise between South Korea and the United States that starts on Aug. 21 and North Korea celebrating its Republic Foundation Day on Sept. 9. On the same day last year, North Korea conducted its fifth nuclear test.

“There’s a chance that North Korea will be making additional provocations while Trump’s mention of possible military actions have frozen investor sentiment,” said Han Dae-hoon, an analyst at SK Securities.

There is fear that foreign investors might continue their selloff, especially since the Kospi, before the heightened tension, was enjoying a bullish rally.

“As investors are selling off to profit from gains and investor sentiment is damaged, it would be best to take a breather or reduce investment,” SK Securities’ Han said.


BY LEE HO-JEONG, YEOM JI-HYUN [lee.hojeong@joongang.co.kr]

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