North Korea claimed on Sunday that it had conducted a test of a hydrogen bomb meant to be carried by a long-range missile. The test — which the North called a "perfect success" — was estimated to have an explosive yield of up to 100 kilotons, news agency Yonhap reported a South Korean lawmaker as saying.
President Donald Trump called North Korea's latest test "hostile and dangerous." When asked about the possibility of a U.S. military attack in response to the North's latest actions, Trump told a reporter, "We'll see."
Trump also suggested on Twitter that the U.S. was considering "stopping all trade with any country doing business with North Korea" as a potential response. The move, if implemented, would likely affect China — North Korea's most important trading partner.
The Sunday test came on the back of heightened geopolitical tensions in the region. The North had launched a missile that flew over Japan just a few days prior.
While analysts acknowledged simmering tensions on the peninsula could remain, full-scale military conflict is thought to be unlikely.
"We expect North Korea to count its chips and continue its current game of brinkmanship, but also remain sufficiently restrained to not cross any implicit red lines," Mizuho Bank FX Strategist Chang Wei Liang said in a note.
Markets also continued to digest weaker-than-expected U.S. employment data released on Friday. U.S. nonfarm payrolls for August showed 156,000 jobs were created, below the 180,000 forecast by economist in a Reuters poll.
Despite the miss, equities in the U.S. closed higher on Friday, with the Dow Jones industrial average rising 0.18 percent to close at 21,987.56.
In corporate news, Malaysia's Petroliam Nasional Berhad, or Petronas, said on Saturday it was not interested in acquiring a majority stake in Daewoo Engineering & Construction, Reuters reported. South Korean media had reported that Petronas was interested in the deal on Friday. Daewoo shares closed down 4.44 percent.
The early surge in Korean defense stocks moderated later during the session. Shares of military systems maker Victek outperformed, closing up 19.04 percent, but other defense plays were subdued: Hanwha Techwin erased earlier gains to decline 1.68 percent while Korea Aerospace was off 2.08 percent by the close.
On the energy front, Brent crude futures declined 0.8 percent to trade at $52.33 a barrel. U.S. West Texas Intermediate tacked on 0.02 percent to trade at at $47.30. Meanwhile, U.S. gasoline futures extended losses made on Friday, falling 3.53 percent to trade at $1.6862 a gallon after September futures climbed above the $2 level before their expiry last week.
Following Tropical Storm Harvey, some pressure had been taken off U.S. crude and gasoline futures, OANDA Senior Market Analyst Jeffrey Halley said in a note.
"It appears that damage to refining capacity is minimal, and with only 5.5 percent now offline from 25 percent a week ago, traders are hopeful that crude backlogs will be cleared," he added.
Meanwhile, the dollar index, which tracks the greenback against a basket of six major currencies, edged down to 92.588 at 2:36 p.m. HK/SIN.
— CNBC's Leslie Shaffer contributed to this report.