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What Can Markets Tell Us About the Conflict in Korea?

Wednesday, 24 Nov 2010 | 12:35 PM ET

In the last 24 hours, many commentators have remarked upon the threat posed to financial markets by yesterday's Korean artillery exchange.

Smoke rises from South Korea's Yeonpyeong island near the border against North Korea. Dozens of artillery shells fired by North Korea hit the South Korean Island of Yeonpyeong reportedly causing injuries and prompting return fire from South Korean forces.
Getty Images
Smoke rises from South Korea's Yeonpyeong island near the border against North Korea. Dozens of artillery shells fired by North Korea hit the South Korean Island of Yeonpyeong reportedly causing injuries and prompting return fire from South Korean forces.

Their comments have been directed toward global markets in general—and to Asian markets in particular.

But what has been the actual short-term economic damage to South Korea — and how have markets priced that impact?

A Forbes blog Post, written by Robert Olsen, points out that the quantifiable hit maybe less than we anticipated:

"South Korea’s Kospi Composite had fallen as much as 2.4 percent in early trading before staging a comeback and closing down just 0.2 penny at 1,925.98. The Korean won followed a similar pattern and recovered most of its losses to finish lower by about 0.5%, according to a Reuters report."

Perhaps this is a Buy-on-Rumor-Sell-on-News effect—only in reverse, where fear rather than greed drives the trading.

And the fear factor in the broader Asian markets seems to be muted — or nonexistent: "Japan’s Nikkei 225 Stock Average dropped 0.8% and Australia fell 0.1 percent. The MSCI index of Asia Pacific shares outside Japan was flat. China’s CSI 300 Index posted a gain of 2.2 percent, while Hong Kong’s Hang Seng rose 0.6%."

In South Korea, officials were perhaps able to soften the blow of potential conflict with the reassuring words that all traders love to hear—in the short run at least: Promises of added liquidity. To quote Forbes: "South Korean authorities sought to calm the markets by saying they would supply further liquidity if needed to limit the repercussions of the attack by North Korea."

Another factor that may have helped to stabilize the Asian markets, as they faced fears of a widening military conflict on the peninsula:

"U.S. President Barack Obama condemned the shelling while offering a message of support for a longtime ally in the region during an interview with ABC News."

“The United States is firmly committed to the defense of our ally, the Republic of Korea, and to the maintenance of regional peace and stability,” the White House said in a statement.

The Forbes article also notes the following: "After speaking by phone with South Korean President Lee Myung Bak, Obama sent the aircraft carrier USS George Washington to take part in exercises off the Korean Peninsula."

And what greater guarantor of stability or freedom could one possibly ask for in a time of threatened hostilities than the sight of a United States aircraft carrier steaming across the horizon?

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