Kim Jong Un Scuttles Korea Asset Rally as Attack Jolts Investors

(Bloomberg) -- The rally in South Korean assets came to an abrupt halt on Tuesday as the specter of a military confrontation with North Korea rattled investors.

Kospi 200 futures pared gains after Kim Jong Un’s regime destroyed an inter-Korean liaison office on its side of the border while some of South Korea’s biggest stocks slid in after-hour trading. Dollar-won non-deliverable forwards and credit default swaps rose.

The escalating tensions undercut the buoyant sentiment which had earlier lifted South Korean markets. The benchmark equity gauge had capped its biggest rally in almost three months and the won paced gains in Asian currencies after the Federal Reserve’s latest move to buy corporate bonds revived risk appetite.

“The blow-up of the inter-Korea office itself is likely to have a short-term impact on the won,” said Kim Yumi, market strategist at Kiwoom Securities Co. “The impact will probably only last one or two days as the won tends to react more to external drivers more than internal ones.”

Onshore markets finished trading when reports of the attack first emerged at around 3:30 p.m. local time, and Kospi 200 futures ended the session up 5.6% after rallying almost 7%. Foreign investors pulled a net 727 billion won ($602 million) from the contracts.

Shares of Top tech firms Samsung Electronics Co. and SK Hynix Inc. dropped more than 1% in after-hour trading, according to data from brokerage Mirae Asset Daewoo. One-month dollar-won non-deliverable forwards rose 0.3% to 1,211.41, suggesting that the South Korean currency will weaken when trading resumes Wednesday.

But for some market watchers, the latest rift isn’t a particularly eventful chapter in the long-running feud between the two nations.

“The Korea markets may slightly fall tomorrow, given foreigners are selling Kospi futures now and individual stocks are falling in after-hour trading,” said Seung Hoon Lee, head of equities at DB Asset Management. “But the alleged explosion was not in South Korean territory, and we experienced similar conflicts under the previous administrations, and it’s not that surprising.”

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