Torpedo tension unnerves Seoul markets

News that a South Korean warship that sank in March was hit by a North Korean torpedo gave investors an extra incentive to sell Seoul stocks and the won overnight.

The blue-chip KOSPI index skidded 1.83% to a three-month low just above the psychologically important 1,600-point level. Both industrial and high-tech companies shared in the retreat.

The won (KRW) also suffered, down 2.3% on the day against the dollar and even declining against the euro in relative terms. KRW is now in technical “sell” territory.

Although fear of a broader conflict with the North was widely reported as a trigger for the selling, it is more likely that the reports only gave already-bearish traders an excuse to unwind their positions. All emerging markets and most emerging currencies have been under pressure in recent weeks as rising volatility and economic concerns drive risk-averse money from stocks.

The won is a key component of the emerging currencies ETF CEW, which has taken a beating since the Greek situation went viral:

Given the literal saber-rattling we are seeing out there, this is probably not a time to take a concentrated position in won. However, stocks are another story. Local analysts are accustomed to tension with the North and stood up to note that the chance of outright war are very slim; it is only the amount of fear already out there that makes the prospect even feasible.

No war puts Korea’s exporters back on relatively even footing, and in fact if the won declines, their competitive profile actually improves. That could be good news for ETFs like EWY, which are heavily loaded with exporters like PKX

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