South Korean Stocks Fall, Bonds Gain After North’s Nuclear Test

South Korea’s stocks declined and government bonds gained after North Korea conducted its third nuclear test, raising political tensions on the peninsula. The won strengthened.

The underground test was conducted at 11:57 a.m. local time, South Korea’s national security adviser Chun Yung Woo said in a televised briefing today. North Korea detonated a “small, light” atomic bomb with high explosive capability, the official Korean Central News Agency said in a statement.

The benchmark Kospi index of shares retreated as much as 0.4 percent from Feb. 8 and closed 0.3 percent lower at 1,945.79 in Seoul. The yield on South Korea’s 2.75 percent bonds due September 2017 dropped two basis points, or 0.02 percentage point, from Feb. 8 to 2.83 percent, Korea Exchange Inc. prices show. The won gained 0.5 percent to close at 1,090.69 per dollar. South Korea’s financial markets were closed yesterday for the Lunar New Year holiday.

“This could be a drag on sentiment for a couple of days, but I think the impact will be limited,” said Heo Pil Seok, chief executive officer at Midas International Asset Management Ltd. in Seoul, which oversees about $5.3 billion. “We’ve seen this happening before, and there’s no reason for now to believe this test is more harmful and aggressive than previous ones.”

South Korea’s defense-related stocks rallied on speculation geopolitical tensions on the peninsula may increase. Victek Co., a maker of electronic warfare equipment, jumped 15 percent, while Firstec Co., a manufacturer of components for helicopters and armored vehicles, surged 13 percent.

Rate Outlook

One-month implied volatility for the won, a measure of expected moves in exchange rates used to price options, fell six basis points to 7.95 percent from Feb. 8.

Goldman Sachs Group Inc. altered its interest-rate forecast for South Korea from no change this year to a 25 basis point cut in the first half, according to a research note released today. Fourteen of 15 economists surveyed by Bloomberg News expect the central bank to hold its benchmark rate at 2.75 percent on Feb. 14. One predicts a reduction to 2.50 percent.

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