(Bloomberg) -- South Korean stocks and the won extended losses on a report Monday that North Korea may be preparing to launch an intercontinental ballistic missile after saying the day before that it tested a hydrogen bomb.
The Kospi index closed down 1.2 percent, the won weakened 0.9 percent against the dollar and the yield on the benchmark 10-year government bonds rose four basis points to 2.31 percent. The benchmark share gauge, which dropped as much as 1.7 percent in the morning, had pared much of that loss before the ICBM report.
Sunday's nuclear test was the first since U.S. President Donald Trump took office, and he threatened to increase economic sanctions and halt trade with any nation doing business with North Korea in response. While markets in Seoul have typically sold off in the immediate aftermath of provocations from Kim Jong Un's regime, they've also been quick to recover -- the Kospi sank as much as 1.6 percent last Tuesday after the launching of a missile over Japan, then reversed almost all those losses by the close.
Chang Kyung-soo, acting chief of the defense ministry's policy planning office, told lawmakers on Monday that North Korea was making preparations for a missile launch, but didn't give a timeframe. South Korea sees a chance that North Korea will fire an ICBM into the Pacific Ocean, Yonhap News reported.
“The risk from North Korea could be different from the past as the regime has now reached close to the ‘red line' by U.S.,” said Lawrence Kim, an analyst at NH Investment & Securities Co. in Seoul. “The reaction from U.S. and China will be key.”
The cost of insuring five-year South Korean sovereign bonds from nonpayment rose to 65 basis points, according to prices from Australia & New Zealand Banking Group Ltd.
Stock Inflows
North Korea has conducted more than a dozen missile tests this year, including several ICBMs, leading to a war of words in August between Trump and Kim's regime that has rattled global markets.
South Korea's government said the impact of North Korea's sixth nuclear test could spread from financial markets to the real economy.
Read more: What U.S.-North Korea hostilities might look like
North Korea's latest action also dented risk appetite across the region, with Japan's Topix stock index falling 1 percent and September contracts for futures on the S&P 500 Index dropping 0.4 percent. The yen strengthened 0.7 percent to 109.54 per dollar on haven demand.
Not everyone was pessimistic about the outlook for the overall market. Overseas investors bought a net $3.9 million of South Korean equities on Monday, according to Bloomberg data using official figures.
“Underlying sentiment toward emerging markets remains strong, and as long as an actual attack is avoided on the Korean Peninsula, the impact from North Korea's latest nuclear test should be short-lived,” said Masakatsu Fukaya, an emerging markets foreign-exchange trader at Mizuho Bank Ltd. in Tokyo. “The extent of the market impact will depend on the reactions from the U.S. and other countries.”
--With assistance from Lianting Tu and Yumi Teso
To contact the reporters on this story: Divya Balji in Singapore at dbalji1@bloomberg.net, Heejin Kim in Seoul at hkim579@bloomberg.net.
To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Sarah McDonald at smcdonald23@bloomberg.net, Andrew Janes
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
