Wednesday, October 11, 2006

North Korea Nuke Test Causes a Drop in South Korea's Index

Source: Markets Steady After N. Korea Test, S. Korea's Market Tumbles After N. Korea's Nuke Test

Following North Korea's announcement that it had conducted an underground nuclear weapons test on Monday, South Korean stocks dropped sharply. The incident has raised concerns that a heightened risk premium may drive investment money away from South Korea's economy. South Korean stocks plunged more then 3% immediately after the announcement before making a slight recovery to 2.4% before the Kospi stock index closed. This was Seoul's lowest level in more than six weeks. Analysts stated that the drop reflected investor worries that political tensions will trigger a sell down in Asian markets and that money will flow out of South Korea. Whatever moves North Korea makes after this point will continue to have an impact on trade.

Some analysts wonder whether the impact of the testing will have an effect on other countries with present political difficulties or instability such as Thailand, which is still reeling from their recent coup. The markets of Europe only showed minor closing changes, but Hong Kong's Seng fell approximately 1.3%. Singapore's Straits Times Index closed down 1%, and Malaysia, Australia, and India's indices indicated minimal drops.


1. Will South Korea experience an exodus of foreign investors that some fear?

2. What steps could South Korea and other Asian countries take to safeguard their economies from potential acts of provocation by Kim Jong-Il in the future?

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