Finance Helper

South Korea’s stocks and won fell after North Korea said it had successfully tested a nuclear weapon and Yonhap News reported that the communist nation also launched a short-range missile.

The Kospi stock index declined as much as 6.3 percent, before paring its losses to close down 0.2 percent. The North’s official Korean Central News Agency said the successful underground test would “bolster its nuclear deterrent for self defense.” The won also pared losses to close 0.1 percent weaker as South Korea said it would discuss any response with the U.S., which may include sanctions.

The test may intensify tension in the Korean peninsula and is the latest blow to efforts to persuade the impoverished North to abandon nuclear weapons development in exchange for economic aid. The Kospi fell as much as 3.6 percent and closed 2.4 percent lower on Oct. 9, 2006, when North Korea conducted its first nuclear test. The gauge rose 0.7 percent the next day.

The impact “from such news is usually short-lived and this is likely to be the case again unless we see a clear change in the political scene, which I doubt at this stage,” said Thomas Harr, a currency strategist at Standard Chartered Plc in Singapore. 

Fitch Ratings said today the security risks posed by North Korea’s nuclear program are “already taken into” account with respect to South Korea’s credit rating. Standard & Poor’s also said the test has no immediate implication for the nation’s long-term foreign-currency credit ranking, which it raised in July 2005 by one grade to A, the sixth highest.

Pared Losses

The Kospi fell 2.85 points to close at 1,400.90 in Seoul. The MSCI Asia Pacific Index of regional shares gained 0.1 percent, reversing an earlier decline of as much as 0.4 percent. The won weakened 0.1 percent to 1,249.0 per dollar, after falling as much as 1.8 percent earlier. The currency has strengthened 18 percent in the past three months.

North Korea also fired a short-range missile today with a range of 130 kilometers, Yonhap reported, citing an unidentified diplomatic source.

The North launched a rocket that flew over Japan on April 5, an act that was condemned by the United Nations. Today’s test was the second time Kim Jong Il’s regime detonated a nuclear device. The first was in 2006. The nation said last month it was quitting six-party talks aimed at dismantling its nuclear weapons program, and expelled UN inspectors in retaliation for the condemnation.

“Investor sentiment will be negatively impacted and it’s going to be difficult to expect big gains in the market in the short-term,” said Kim Yong Tae, a fund manager at Yurie Asset Management Inc. in Seoul, which manages the equivalent of $1.2 billion in assets. “Still, the sensitivity of the North Korean issue has been decreasing compared with the past.”

“Unacceptable”

U.S. House Speaker Nancy Pelosi said today’s test was “unacceptable” and a “cause for great alarm,” according to an e-mailed statement. “The Chinese must use their influence to help bring North Korea to the table for the six-party talks,” Pelosi said. She is currently in Shanghai as part of a congressional delegation visiting China.

Samsung Electronics Co., Asia’s biggest maker of chips and flat screens, retreated 0.9 percent to close at 545,000 won on the Korea Exchange. Posco, Asia’s third-largest steelmaker, fell 0.6 percent to 396,000 won. Hyundai Heavy Industries Co., the world’s largest shipyard, lost 1.3 percent to 225,000 won.

Covering Shorts

U.S. Army Lieutenant General Donald Maples, director of the Defense Intelligence Agency, told Congress in February that North Korea “may be able to successfully” mount a nuclear warhead on a ballistic missile.

“The won started to slide after the report of the North’s nuclear test,” said Roh Sang Chil, a currency dealer with Kookmin Bank in Seoul. “Domestic banks are covering dollar shorts en masse.” A short is a bet that a currency will decline.

Government bonds rose. The yield on the benchmark five-year debt due in March 2014 fell three basis points to 4.52 percent, according to data compiled by Bloomberg.

“We are not still clear about the situation,” said James Lee, an economist with JPMorgan Chase & Co. in Seoul. “From past experience, the markets recovered from a brief slump.”

Source: Bloomberg.