Nervous Markets Await Next Move After North Korea Claims ICBM Test

  • South Korean assets drop, with won poised to extend losses
  • Escalation of tension boosts haven assets including yen

U.S. Confirms North Korea Rocket Was ICBM

South Korean assets extended losses on Tuesday as the latest bout of saber-rattling by its northern neighbor unnerved investors.

North Korea’s announcement that it had successfully test-fired an inter-continental ballistic missile sent the South Korean won 0.3 percent lower to its weakest level against the dollar in more than three months, with further losses in store, according to Bank of Singapore Ltd. The benchmark Kospi stock index dropped 0.6 percent, while yields on South Korea’s 10-year bonds rose four basis points to 2.28 percent.

The missile test brings North Korea a step closer to its aim of building a device capable of carrying a nuclear warhead to the U.S., adding to geopolitical risks ahead of a planned meeting this week between President Donald Trump and Chinese counterpart Xi Jinping at the Group of 20 summit in Germany. What comes next is what really matters for investors, said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd.

“It’s a ratcheting up of the situation that has been simmering for a while,” he said. Bank of Singapore sees the won weakening toward a key support level of 1,160 per dollar, from 1,150.70 on Tuesday. “Investors have a case to be worried but whether the worry will turn into something more serious we need to see what develops on the political front.”

Read more: North Korea claims its first successful launch of an ICBM

Escalating tensions will weigh on South Korea’s growth prospects, according to Nomura Holdings Inc. Still, wider market reaction has been relatively muted as investors await the political fallout, said Kumiko Ishikawa, a currency analyst at Sony Financial Holdings Inc. “We want to see how President Trump and China react to this.”

China called for calm and restraint by all parties, Foreign Ministry spokesman Geng Shuang said Tuesday at a regular briefing, according to China Central Television. Trump responded earlier on Twitter, asking of North Korean leader Kim Jong Un “does this guy have anything better to do with his life?” The U.S. president has said all options including military force are available against Pyongyang, though North Korea’s neighbors have warned a strike could be disastrous for North Asia, given the risk of retaliation.

The Japanese yen rose as much as 0.6 percent Tuesday as investors sought haven assets. Gold gained 0.3 percent, heading for its first advance in four days.

“If the rise in defense spending in Japan, China and the U.S. and Nato countries is indicative of geopolitical risk, safe-haven demand is likely to continue limiting scope for the carry trade to pressure the yen lower,” Jane Foley, head of foreign-exchange strategy at Rabobank in London, wrote in a client note. She forecast the Japanese currency will remain in the 109 to 114 per dollar trading range in the months ahead.

— With assistance by Sid Verma, Lilian Karunungan, Yumi Teso, and Chikafumi Hodo

(Corrects spelling of strategist’s name in third paragraph.)
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