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Won Reverses Gain, Kospi Drops on North Korea’s Nuclear Plans

The won and the Kospi index of shares dropped to their lowest levels in at least a week after North Korea said it will restart its Yongbyon nuclear site, heightening tensions on the peninsula. Government bonds gained.

The won reversed earlier gains after the North’s official Korean Central News Agency said a uranium enrichment plant and a graphite-rod reactor mothballed since 2007 will resume operations “without delay.” The facility was shut down after an agreement was reached at six-nation talks aimed at persuading the totalitarian state to scrap its nuclear arms program.

“The North Korean threat, which has been a potential risk in the markets, has emerged once again as a negative factor,” said Lee Dae Ho, an analyst at Hyundai Futures Corp. in Seoul. “Stocks and the won both dropped after the North Korean announcement as investors are concerned the risk was heightened to a level that may affect neighboring countries involved in the six-party talks, not just the Korean peninsula.”

The won closed 0.3 percent weaker at 1,117.98 per dollar in Seoul, after earlier strengthening as much as 0.4 percent, according to data compiled by Bloomberg. That’s the lowest level since March 22. The Kospi (KOSPI) index dropped 0.5 percent to 1,986.15, its worst close since March 26.

North Korea said on March 30 that a “state of war” exists with the South and warned it may shut a jointly run industrial zone in its border city of Gaeseong. Kim Jong Un, the communist state’s leader, said March 31 nuclear weapons development is a priority as the country ratcheted up tensions by repeating threats to attack the U.S.

Stock Outflows

Overseas investors sold the most South Korean equities in 10 months in March as tensions with the North escalated. Global funds unloaded a net 2.6 trillion won ($2.3 billion) of Kospi shares, the heaviest monthly net sales since May 2012, Korea Exchange Inc. data showed. The currency dropped 2.6 percent during the month and the Kospi lost 1.1 percent.

STX Offshore & Shipbuilding (067250) tumbled by the daily limit of 15 percent today as did other STX Group units such as STX Corp. (011810) and STX Pan Ocean Co., after the shipbuilder said it is seeking voluntary debt restructuring with creditors. Banks also declined on speculation bad-loan provisions may increase.

“Continued threats from North Korea and somewhat strong responses from the U.S. could be a source of worry among foreign investors,” Lee Jin Woo, a fund manager at Seoul-based KTB Asset Management Co., said by phone today. “STX news chilled sentiment towards the entire group units and bank stocks.”

Defense Stocks

Victek Co., a maker of electronic warfare equipment, led South Korean defense stocks higher on speculation geopolitical risks will increase, rising by 14 percent. Firstec Co., a maker of components for helicopters and armored vehicles, rose 6.6 percent, while Speco Co. (013810) added 15 percent.

South Korea called on the North today to abide by its commitment to a nuclear-free Korean peninsula, Foreign Ministry spokesman Cho Tai Young told reporters in Seoul. South Korea will continue to watch the situation closely, Cho said.

The yield on South Korea’s 2.75 percent bonds due March 2018 fell one basis point to 2.56 percent, according to prices from Korea Exchange Inc. The five-year yield reached 2.51 percent on March 29, the lowest it has been in Bloomberg data going back to 2000, amid a worsening economic outlook.

The South Korean government lowered its 2013 growth forecast on March 28 to 2.3 percent from a December projection of 3 percent.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net; Saeromi Shin in Seoul at sshin15@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net; Darren Boey at dboey@bloomberg.net

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