Bombardment of a South Korea island, its impact on markets
Thursday, 25 November 2010
Maswood Alam Khan in Maryland, USA
WHEN asked by a correspondent in an interview with ABC News “Is not attack on South Korea an attack on the US?”, US President Barack Obama replied: “South Korea has been our ally since the Korean War and we strongly affirm our commitment to defend South Korea as part of that alliance”. But when he was asked, “Would you put US troops on alert?” Obama stammered a little bit as he said: “I am not going to speculate on military action at this stage, but would consult with South Korean President Lee Myung-bak, on the crisis”.
The world attention is now focused on what is going to happen in the Korean peninsula as tensions are apparently reaching the boiling point in the cape after North Korea early Tuesday shelled at the South Korean island of Yeonpyeong, killing two South Korean soldiers and wounding 18 soldiers and civilians and prompting an exchange of fire between the two sides, involving around 175 artillery shells and lasting about an hour. The North Korean attack was the first on a civilian area of South Korea since the Korean War.
North Korea, however, accused South Korea of having started the exchange by firing shells inside the North Korean territory during a set of South Korean military exercises and the South Korea denied that charge, saying that its soldiers were merely conducting military drills and that no shots fell in North Korean territory.
This latest spike in hostilities between South Korea and North Korea, the two old adversaries, may, God forbid, turn into an escalation in rivalry between the USA and China with 28,000 US military personnel stationed in South Korea, a longtime ally of America, and with China, a longtime backer of North Korea, watching how South Korea backed by America now reacts while North Korea is believed to have already eight to twelve nuclear bombs in its lethal arsenal.
The United States, Britain and Japan have already condemned the North Korean attack, with America calling on the North to “halt its belligerent action”. China said it was “concerned” while Russia has urged restraint and a peaceful solution to the crisis.
Tensions in the Korean peninsula have actually been simmering high since last March, when a South Korean naval vessel was sunk in the same area, killing 46 South Korean sailors. It is widely believed that a North Korean torpedo had attacked the South Korean vessel, though the North Korea denied its involvement. Then again early this month, the South Korean navy fired warning shots at a North Korean fishing boat after the craft wandered across the border. The North Korean boat however recoiled back after hearing the firing shots.
Some analysts believe Tuesday’s action by North Korea was to exert leverage over America and South Korea with a threat: “Give food and aid or face the horror of war”. North Korea’s such muscle-flexing is their old ploy, their long-term strategy of maneuvering their way to the negotiating table, extracting concessions, and then repeating the same process time and again.
Such North Korean menace sounds like a kind of a threat a naughty child sometimes poses to his mother saying ‘either buy me the big toy or I will smash the best china in your showcase’.
North Korea is in a desperate situation and they need food immediately. But, Obama administration has refused to remove sanctions against the North, imposed in response to its nuclear programme. After sensing that they can’t exert much pressure on Washington any more, North Korean regime has perhaps taken South Korea hostage instead.
Other analysts believe Kim Jong Il, the North’s ailing and reclusive leader, is eager to show to the world that he still holds sway over his military and hopes that as his successor his son, Kim Jong Un, who in September was promoted to the rank of four-star general, would follow his father’s footsteps in employing the so-called “military first” approach to politics and turning the North Korean army into a so-called “pillar of the revolution”.
A separate FT analysis by Dave Shellock adds: Risk sentiment suffered a serious deterioration as North Korea’s bombardment of a South Korean island added a fresh layer of uncertainty to markets already burdened with concerns about eurozone debt and the tightening of Chinese policy.
Global equities, commodities and the euro came under heavy selling pressure as investors sought safety in the dollar and the “core” government bonds of the US, Germany and the UK. Gold also rose, in spite of the dollar’s firmer tone.
“The market mood has darkened considerably as a cluster of headwind factors have resurrected fears about a fragile global financial system, outweighing the positive signals from economic figures that point to a continued expansion,” said Lena Komileva, head of Group of Seven (G7) market economics at Tullett Prebon.
News of the sudden escalation of tensions in the Korean peninsular came too late to have much immediate impact on Seoul’s stock market but left the Won currency sharply lower against the dollar.
Analysts said the markets would remain sensitive to further developments in the region but the general view was that the situation would most likely be limited to “sabre-rattling”.
“Despite the increasingly erratic behaviour of the North Korean regime, we still view a full-blown war between the two Koreas as only a remote possibility,” said Flemming Nielsen, senior analyst at Danske Bank. “The incident’s impact on the financial markets is likely to prove temporary.”
The intensification of geopolitical and sovereign debt worries prompted a sharp sell-off in global equities in New York, Seoul and Hong Kong.
The flight from risk triggered broad gains for core government bonds, with the 10-year US Treasury yield down 5.0bp to 2.75 per cent and the German Bund yield 11bp lower at 2.55 per cent.
In commodities, oil spent much of the day below $81 a barrel, while copper neared a one-week low. Gold climbed above $1,370 an ounce.
There was little market response to the day’s main economic releases. US third-quarter growth was revised up to an annualised rate of 2.5 per cent from 2.0 per cent, slightly more than economists had expected.
Across the Atlantic, eurozone purchasing managers’ indices came in stronger than expected, flagging a solid re-acceleration in both factory and services activity, analysts said.
WHEN asked by a correspondent in an interview with ABC News “Is not attack on South Korea an attack on the US?”, US President Barack Obama replied: “South Korea has been our ally since the Korean War and we strongly affirm our commitment to defend South Korea as part of that alliance”. But when he was asked, “Would you put US troops on alert?” Obama stammered a little bit as he said: “I am not going to speculate on military action at this stage, but would consult with South Korean President Lee Myung-bak, on the crisis”.
The world attention is now focused on what is going to happen in the Korean peninsula as tensions are apparently reaching the boiling point in the cape after North Korea early Tuesday shelled at the South Korean island of Yeonpyeong, killing two South Korean soldiers and wounding 18 soldiers and civilians and prompting an exchange of fire between the two sides, involving around 175 artillery shells and lasting about an hour. The North Korean attack was the first on a civilian area of South Korea since the Korean War.
North Korea, however, accused South Korea of having started the exchange by firing shells inside the North Korean territory during a set of South Korean military exercises and the South Korea denied that charge, saying that its soldiers were merely conducting military drills and that no shots fell in North Korean territory.
This latest spike in hostilities between South Korea and North Korea, the two old adversaries, may, God forbid, turn into an escalation in rivalry between the USA and China with 28,000 US military personnel stationed in South Korea, a longtime ally of America, and with China, a longtime backer of North Korea, watching how South Korea backed by America now reacts while North Korea is believed to have already eight to twelve nuclear bombs in its lethal arsenal.
The United States, Britain and Japan have already condemned the North Korean attack, with America calling on the North to “halt its belligerent action”. China said it was “concerned” while Russia has urged restraint and a peaceful solution to the crisis.
Tensions in the Korean peninsula have actually been simmering high since last March, when a South Korean naval vessel was sunk in the same area, killing 46 South Korean sailors. It is widely believed that a North Korean torpedo had attacked the South Korean vessel, though the North Korea denied its involvement. Then again early this month, the South Korean navy fired warning shots at a North Korean fishing boat after the craft wandered across the border. The North Korean boat however recoiled back after hearing the firing shots.
Some analysts believe Tuesday’s action by North Korea was to exert leverage over America and South Korea with a threat: “Give food and aid or face the horror of war”. North Korea’s such muscle-flexing is their old ploy, their long-term strategy of maneuvering their way to the negotiating table, extracting concessions, and then repeating the same process time and again.
Such North Korean menace sounds like a kind of a threat a naughty child sometimes poses to his mother saying ‘either buy me the big toy or I will smash the best china in your showcase’.
North Korea is in a desperate situation and they need food immediately. But, Obama administration has refused to remove sanctions against the North, imposed in response to its nuclear programme. After sensing that they can’t exert much pressure on Washington any more, North Korean regime has perhaps taken South Korea hostage instead.
Other analysts believe Kim Jong Il, the North’s ailing and reclusive leader, is eager to show to the world that he still holds sway over his military and hopes that as his successor his son, Kim Jong Un, who in September was promoted to the rank of four-star general, would follow his father’s footsteps in employing the so-called “military first” approach to politics and turning the North Korean army into a so-called “pillar of the revolution”.
A separate FT analysis by Dave Shellock adds: Risk sentiment suffered a serious deterioration as North Korea’s bombardment of a South Korean island added a fresh layer of uncertainty to markets already burdened with concerns about eurozone debt and the tightening of Chinese policy.
Global equities, commodities and the euro came under heavy selling pressure as investors sought safety in the dollar and the “core” government bonds of the US, Germany and the UK. Gold also rose, in spite of the dollar’s firmer tone.
“The market mood has darkened considerably as a cluster of headwind factors have resurrected fears about a fragile global financial system, outweighing the positive signals from economic figures that point to a continued expansion,” said Lena Komileva, head of Group of Seven (G7) market economics at Tullett Prebon.
News of the sudden escalation of tensions in the Korean peninsular came too late to have much immediate impact on Seoul’s stock market but left the Won currency sharply lower against the dollar.
Analysts said the markets would remain sensitive to further developments in the region but the general view was that the situation would most likely be limited to “sabre-rattling”.
“Despite the increasingly erratic behaviour of the North Korean regime, we still view a full-blown war between the two Koreas as only a remote possibility,” said Flemming Nielsen, senior analyst at Danske Bank. “The incident’s impact on the financial markets is likely to prove temporary.”
The intensification of geopolitical and sovereign debt worries prompted a sharp sell-off in global equities in New York, Seoul and Hong Kong.
The flight from risk triggered broad gains for core government bonds, with the 10-year US Treasury yield down 5.0bp to 2.75 per cent and the German Bund yield 11bp lower at 2.55 per cent.
In commodities, oil spent much of the day below $81 a barrel, while copper neared a one-week low. Gold climbed above $1,370 an ounce.
There was little market response to the day’s main economic releases. US third-quarter growth was revised up to an annualised rate of 2.5 per cent from 2.0 per cent, slightly more than economists had expected.
Across the Atlantic, eurozone purchasing managers’ indices came in stronger than expected, flagging a solid re-acceleration in both factory and services activity, analysts said.