NK tension dampens stocks, currency

South Korea’s stock markets and currency remained weak for the second consecutive day Thursday, amid escalating political tension on the Korean Peninsula.

The first-tier market’s composite index Kospi closed at 2,359.47, down 0.38 percent from Wednesday, while the tech-heavy Kosdaq dropped 0.44 percent. The Kospi extended its three-day losing streak, while the Kosdaq tumbled for two consecutive days.

Foreign investors adhered to selling for two straight days. Offshore buyers sold stocks worth 287.1 billion won ($251.5 million) on the Kospi Thursday. They net sold 256.3 billion won Wednesday, when the Kospi saw a 1.1 percent slide. On Wednesday, the local IT sector saw the highest amount of net sales, according to data from KB Securities. Offshore net sales of IT stocks came to 327 billion won, while non-IT sectors saw foreigners’ net purchase of 71 billion won.

The government bond market ended its three-day bearish trend Thursday, which arose due to a remark on Monday by a presidential aide that the central bank’s low key rate policy is “problematic.” 

The three-year sovereign treasury bond yield came to 1.824 percent Thursday, down 0.009 percentage point, while the five-year yield was at 2.024 percent, down 0.014 percentage point.

On Wednesday, the treasury yield of the three-year bond was the highest in two years and a quarter at 1.833 percent, while the yield of the five-year bond came to 2.038 percent, the highest in two years.

Analysts pointed to the escalating tension surrounding North Korea’s nuclear warhead capability this week, which accelerated a foreign cash exodus from local markets.

US President Donald Trump on Tuesday said North Korea would be met with “fire and fury.” Trump’s remark came immediately in response to evidence from the US Defense Intelligence Agency that North Korea had completed the production of nuclear missiles capable of attacking the US mainland or Western Europe.

The war of words between the US and North Korea indicated that the North Korea issue is taking a new turn, impacting markets in South Korea, wrote Kim Hyo-jin, an analyst at SK Securities, in a Thursday note.

“The North Korea issue was limited to the two Koreas before, and now the issue has evolved into a US-North Korea conflict,” Kim wrote.

The Kospi had virtually remained unscathed from North Korea‘s missile threat during the first two months of since President Moon Jae-in came to power in May. Foreign investors net bought Kospi-listed stocks following North Korea’s missile launch, except for May 15 when foreingers net sold 97.1 billion won whereas the Kospi rallied 0.2 percent.

Another analyst, Lee Kyoung-min of Daishin Securities, wrote Thursday the geopolitical conflict would not die down in the near future.

“Military action from either the US or North Korea is unlikely, but neither is willing to talk (of warm rapport),” Lee wrote. “Moreover, the annual Korea-US joint military exercise, the Ulchi Freedom Guardian slated for Aug. 21, is piling pressure on local markets, leaving them risk-sensitive.”

Local currency weakened by 6.8 won against the dollar from the previous session’s close Thursday. The currency was being traded at 1,142 won against the greenback at 3:30 p.m. Thursday.  On Wednesday, the currency weakened by 10.1 won. The won-dollar currency rate was maintained below 1,130 won for nearly a month until Tuesday.

In terms of foreign exchange rate, Lee of Daishin Securities added the weakening won would “catalyze foreign investors’ profit-taking,” leaving the Kospi harder to escape from North Korea risks.

Investors turning to safe havens was visible in the local market. Gold in Korea rose 0.27 percent in the two days through Thursday and was being traded at 50,400 won per gram.

By Son Ji-hyoung (consnow@heraldcorp.com)