North Korea's step towards a nuclear moratorium is a positive sign, but strategists say the market response may be relatively muted until its government follows up its pledge with real action.
“If North Korea is serious about this, it's a piece of very good news and would take some tensions out on the international front,” said Bruce McCain, chief investment strategist at Key Private Bank. "But we’ve also heard other positive statements from North Korea in the past, so we need to remain skeptical."
On Wednesday, North Korea agreed to implement a moratoriumon its nuclear tests and long-range missile launches, which have previously raised military tensions with neighbors South Korea and Japan. In addition, North Korea said it will allow international inspectors to monitor activities at its main nuclear complex in Yongbyon.
There was minimal market reaction in the U.S. following the report, with traders citing concerns in the Middle East as a more immediate global threat.
Meanwhile, the Korean won rose against the U.S. greenback when the news was released. South Korean stock market was shut for a public holiday on Thursday.
“The currency move may be a precursor of the South Korean equity market going higher,” said Dennis. "But you need to see what the follow-through is—these types of news don’t have a lasting effect on the market."
Dennis also noted that the Korean market has already been trading near its best levels in 2012.
While the latest news from North Korea may help reduce the political risk premium that shrouds the South Korean market, strategists are waiting for further development.
“While this piece of news is a step in the right direction, it lacks substance to have an impact on the financial markets,” wrote Duke Shin, Vice President of Asian Equity Sales at Auerbach Grayson. “We are still long ways away from sustainable and significant reduction in the geopolitical risk in Korea.”
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