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Market’s Reaction to ICBM Test Mixed

Posted July. 06, 2006 03:00,   


Local financial markets plunged at the opening yesterday on news of North Korea’s missile test, but bounced back soon.

The benchmark Korea Composite Stock Price Index, once dropped by 25.23, recorded 1,279.85, 6.07 point or 0.47 percent lower than the previous day, and Korea Securities Dealers Automated Quotation closed at 575.98, falling 9.85 points, or 1.68 percent.

The won-dollar exchange rate once rose up to 948.9 during the day (depreciation of the Korean Won), but closed at 946.7, 4.1 won higher than a day earlier.

The bond prices rose and interest rates dropped in response to the falling stock prices. The three-year Korean Treasury Bond’s (KTB) rate was 4.85 percent and dropped by 0.04 percent points, showing a downward trend of long- and short-term interest rates.

“This demonstrates stronger fundamental of the Korean economy,” said Lee Jung-chul, senior researcher at the Samsung Economic Research Institute, and went on to say that “Yet it can not be ruled out that the economy might be shaken if the situation worsens.”

Foreign financial markets reacted more sensitively. Most Asian stocks with the exception of Shanghai in China fell 0.2 to 1.1 percent after the North test-fired missiles.

Spot gold reached the 630 dollar per ounce mark, up from 620 dollars, in Hong Kong and Tokyo.

To minimize the impact of North Korea’s missile launches on the financial markets, the government will cooperate with financial regulatory authorities to form a taskforce to monitor the market and to implement measures to stabilize it, if necessary.

No Foreign Selling-

Foreigners bought stocks at the local market but they recorded net selling of 21.9 billion won.

In the stock index futures market, they bet stock prices will rise by buying 4,159 contract cases.

Experts say foreign investors responded calmly.

“Foreigners inquired how we predict the markets when they saw little impact,” said Jang Young-woo of UBS Securities, and added, “It seems unlikely that they will sell out massively since they are watching the market calmly.”

But some said “It is possible that the financial market was calm since the U.S. market closed on the previous day, Independence Day,” hinting at the possibility of different reactions.

Mixed Sovereignty Rate-

On whether the North’s missile launch would negatively affect Korea’s sovereign rating, international credit rating agencies showed mixed reactions.

“There is no question that North Korea’s missile test will have negative consequences on Korea’s sovereignty rating, yet it is too early to say whether Korea’s A+ rating will be downgraded,” said James McCormack, head of Asia Sovereigns at Fitch.

“As long as North Korea-related risks are contained, ‘positive prospect’ on A3 rating of Korea will not be affected,” said Thomas Byrne, vice president of Moody’s.

S&P said at present, the missile tests will not directly change Korea’s credit rating.

“The sovereignty rating is heading for higher level and with this incident, it will only require more time,” said Bahk Byong-won, Vice Minister of the Ministry of Finance and Economy.

“Spread of foreign exchange stabilization bonds that shows Korea’s overseas credit was about the same compared to the previous day, which demonstrates that the North’s missile launches will have limited impact,” said Kim Kyung-soo, professor at School of Business Administration of Sungkyunkwan University.

Worried Business Circles-

The businesses were concerned about its consequences on inter-Korea economic cooperation.

“We have overcome crises in relation to North Korea’s political situations but never suspended. We see economic sanctions on the North will not include civil exchanges such as Mt. Geumgang tours,” said Hyundai Asan.

Yet it has worries that demands on tours to the North will dampen in the run-up to summer peak season.

Korea Land Corporation that leads the Gaesong Industrial Complex project decided to sell 574,000 pyeong of plant land on three occasions this year. Since it planned to issue the first public notice within this month, it worries that its plan will suffer disruptions following the missile test.

It will also affect Korea’s support of fertilizer to the North.

Namhae Chemical’s Kim Jong-wook, in charge of North Korean project, said, “We have sent 200,000 tons of fertilizer to the North that was agreed at the ministerial level talks in April. But if the South-North relationship strains, North Korea cannot expect an additional 100,000 tons of aid.”