Korean ADRs Sink to 7-Month Low on Tension as CDS Surge

South Korean shares in the U.S. fell to the lowest level since September, the won tumbled and credit risk surged as the government said North Korea may be ready to conduct a nuclear test or missile launch as early as this week.

The Bank of New York Mellon Korea ADR Index, which tracks American depositary receipts of South Korean companies in New York, lost 0.5 percent to 170.93, the lowest close since Sept. 6. ADRs of KB Financial Group Inc. dropped to an eight-month low, while LG Display Co. slid 1.1 percent. The Kospi Index lost 0.4 percent in Seoul, adding to last week’s 3.9 percent slump, while the won weakened 0.7 percent versus the dollar. Credit-default swaps also jumped to the highest level since September.

Foreign funds sold a net $1.2 billion of Kospi equities last week as tensions with the North escalated, data compiled by Bloomberg show. North Korea is ready to conduct a fourth underground atomic weapon test at its Punggye-ri site, after carrying out its third Feb. 12, according to South Korean Defense Ministry spokesman Kim Min Seok. National security chief Kim Jang Soo said yesterday that the North may stage a provocation including a ballistic missile test around April 10.

“We’ve moved beyond rhetoric,” said Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees about $380 billion. “The geopolitical uncertainty of Korea is a concern because it’s a slightly different pattern now. At this stage, it’s more of a concern than prior events on the peninsula.”

The Kospi 200 Volatility Index, a measure of the cost to protect against equity losses, slid 1.2 percent today after surging 11 percent April 5. International investors unloaded $3.1 billion of South Korean shares this year, the most among 10 markets tracked by Bloomberg.

Nuclear Strikes

North Korea will probably carry out a small military attack in the region so the country’s leader, Kim Jong Un, can brandish his power, the chairman of the U.S. House intelligence panel said today.

“I do think there will be some small skirmish before this is over,” Representative Mike Rogers, a Michigan Republican, said in an interview at Bloomberg News headquarters in New York.

North Korea’s threats to carry out pre-emptive nuclear strikes against the U.S. and South Korea have prompted calls for dialogue. Chinese President Xi Jinping said yesterday that no country should be allowed to instigate regional chaos and the U.S. postponed a missile test to avoid making the situation worse. U.S. Ambassador to China Gary Locke said “China and the United States and the world community are very concerned about the provocative acts and statements” made by North Korea.

Construction activity observed at the North Korea Yongbyon nuclear site is “very troubling” as it violates United Nations Security Council resolutions, UN nuclear chief Yukiya Amano told journalists today in Washington.

Surging Swaps

Five-year swaps used to protect against a default by South Korea rose 3.8 basis points, or 0.038 percentage point, to 87.1 basis points, the highest level since Sept. 12 based on New York prices compiled by Bloomberg. South Korea’s five-year credit default swaps have surged 87 percent over the past month, the third-biggest jump by percentage after Sweden and Norway among countries tracked by Bloomberg.

The Kospi fell for a sixth day today, closing at the lowest level since Nov. 28. The won depreciated to the lowest level since July against the dollar.

“Geopolitical risk from the North Korean threat is likely to weigh on the South Korean won for an extended period of time,” said Suh Dae Il, an analyst at KDB Daewoo Securities Co. in Seoul.

LG Display, the world’s second-biggest maker of flat panels, retreated to $13.33 in New York. KB Financial slipped 0.4 percent to $31.47, the lowest closing level since August.

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