Won, Stocks Slide on Report of Kim Jong Un’s Health
(Bloomberg) -- Kim Jong Un is suddenly back on investors’ radars.
After focusing on little else but the coronavirus crisis in recent weeks, money managers got an unexpected jolt on Tuesday after unconfirmed reports that the North Korean leader’s health may have deteriorated. While information coming out of the isolated country was limited, investors didn’t wait to react: South Korean assets sank and risk-off moves in global markets gathered pace.
Speculation over Kim’s health has revived concerns about potential instability in the nuclear-armed nation, which has been ruled by three generations of Kims but has yet to lay out a clear succession plan. While North Korea has taken steps to improve relations with South Korea and the U.S., progress has been slow in recent months and it’s unclear how the regime would respond if something serious were to happen to Kim.
“In times of such chaos, the North tends to become tougher in terms of foreign relations,” said Min Gyeong-won, an economist at Woori Bank in Seoul.
Here’s a closer look at how markets in South Korea and elsewhere are reacting to the news:
Traders of South Korea’s won were among the first to respond, knocking the currency out of a range against the dollar it had held since March 25. The won weakened 0.8% to 1,230.25 per greenback at 3:06 p.m. local time and earlier reached 1,240.90, the lowest since April 2.
Unless authorities step in to reassure markets, the South Korean currency may drop as low as 1,300, according to Woori Bank’s Min. Rising geopolitical risks add another layer of risk for the won, which recently tumbled to an 11-year low of 1,296.75 because of concerns about the coronavirus pandemic’s toll on South Korea’s export-dependent economy.
The nation’s benchmark Kospi stock index plunged as much as 3%, while defense shares rallied. Hanwha Aerospace Co. surged as much as 26% and Korea Aerospace Industries Ltd. jumped as much as 22%.
If the Kim reports are accurate, “it could be negative for financial markets, as the succession plan under the current leader of North Korea doesn’t seem to be clear,” said Jeon Kyungdae, chief investment officer at Macquarie Investment Management Korea. “Former leaders had designated an heir apparent before their death.”
South Korean bonds also slumped, with ten-year yields rising three basis points to 1.48% and three-year yields climbing three basis points to 1.04%.
The Kim report “sparked risk aversion and boosted the risk premium of South Korean assets, which could explain why all won-denominated assets are falling,” said Qi Gao, a foreign-exchange strategist at Scotiabank in Singapore.
The risk-off tone also spread outside Korea, with U.S. stock-index futures slipping and the dollar strengthening against emerging-market currencies in Asia. The Japanese yen strengthened on haven demand, while the country’s defense stocks climbed. Howa Machinery, a maker of assault rifles, gained more than 14% and Hosoya Pyro-Engineering, which produces flarebombs, jumped almost 18%.
“The uncertainty about who succeeds him in North Korea is the great unknown,” said Jeffrey Halley, senior market analyst at Oanda Asia Pacific Pte, conjecturing about a potential worst-case scenario for Kim. “That’s what is making markets nervous.”
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