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Stocks fall, dollar up after death of Kim Jong-il

business Updated: Dec 19, 2011 12:46 IST

Reuters
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Asian stocks and US index futures fell, with South Korean shares tumbling as much as 5%, and the dollar gained after North Korea announced the death of leader Kim Jong-il, raising fears of regional instability.

The Korean won fell 1.8% on the news, announced at 0300 GMT, which financial markets fear could mean instability in northeast Asia because of the unpredictability of a leadership transition in the impoverished, secretive North.

Commodities also fell broadly, as investors reacted by shedding riskier assets in favour of the safe-haven dollar.

"The risk or fear that the death of Kim Jong-il will lead to provocation by North Korea is pressuring selling," said Hiroyuki Fukunaga, CEO of Investrust, in Tokyo. "Right now, there's going to be a sell-off as part of a risk-off."

MSCI's broadest index of Asia Pacific shares outside Japan

extended losses to stand down 2.6%, while South Korea's benchmark index was down 3.3%, having fallen as much as 5% earlier.

Japan's Finance Minister Jun Azumi said he was monitoring financial market moves after the news, which put regional powers on edge over what might happen next in the isolated state, whose collapsing economy and bid to become a nuclear weapons power pose major threats to northeast Asia.

Tokyo's Nikkei share average fell 1.0%, while the dollar jumped 0.5 % against the yen and S&P 500 futures fell 0.6%. The dollar was up 0.2% against a basket of currencies.

Risk Aversion
"In light of uncertainties about what would follow after his death and what implications it would have on Asia, the initial reaction is to seek safe-haven in the dollar," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

South Korean credit default swap (CDS) spreads, a gauge of investors' perception of risk, widened and Seoul's sovereign bonds weakened across the board after a tearful North Korean state television announcer broke the news of the death of the 69-year-old "Dear Leader", who had ruled the state since 1994.

The 5-year South Korean CDS was traded at 170 basis points (bps), about 10bps wider than the opening level.

Kim's youngest son, Kim Jong-un, is seen as the leader-in-waiting after being appointed to senior posts in 2010, but analysts say there are big questions over the credibility of a little-known figure who is still only in his 20s.

"My guess is that it won't be a smooth leadership transition, it will probably be a testing time domestically," said Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong.

Commodities, which were already under pressure due to Europe's sovereign debt crisis, also fell, with copper down 1.8 % at around $7,210 a tonne and Brent crude off 0.6% at about $102.70 a barrel.

Europe downgrade fears
The euro, meanwhile, fell on fears that possible credit ratings downgrades of several European countries could derail progress towards resolving the euro zone's debt crisis.

Fitch Ratings warned on Friday it may downgrade France and six other euro zone countries, saying a comprehensive solution to the region's debt crisis was "technically and politically beyond reach".

Fitch revised the outlook on France's top-notch rating to negative, saying the downgrade was not imminent but could come in two years. For Belgium, Cyprus, Ireland, Italy, Slovenia and Spain, a downgrade could come much sooner, as those nations were placed on credit watch negative, which traditionally signals the possibility of a downgrade within three months at most.

While credit downgrades are anticipated, thinning activity ahead of the Christmas holidays and concerns about the European debt woes dragging global growth helped aggravate price moves.

The euro fell 0.5 % to around $1.2985, not far off an 11-month low of $1.2944 hit last week.

European policymakers made some progress in pursuing fiscal consolidation in Europe at a key summit meeting earlier in the month, but failed to nail down a convincing commitment for a crucial bailout programme, prompting rating agencies to respond negatively.

Markets will wait for the outcome of a finance ministers' teleconference from 1430 GMT on Monday.

European Union officials said euro zone finance ministers will discuss the draft text of the new euro zone fiscal compact so that it can be finalised by the end of January. They will also consider the size of individual bilateral loans to the International Monetary Fund (IMF).