Missile rocks Bursa, but ringgit holds its ground

by MARK RAO / Pic by BLOOMBERG

North Korea’s missile launch yesterday hit regional markets, but analysts believe the shock will subside quickly as markets have grown desensitised to short-term geopolitical conflicts.

The benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) fell by 8.35 points yesterday to close at 1,761.14 in tandem with weaker global markets, while the ringgit strengthened slightly as news of the North Korean missile trajectory over northern Japan raised political tension in the region.

The FMB KLCI tested a low of 1,756.92 before pre-close buying saw the index close at 1,761.14.

Inter-Pacific Research Sdn Bhd head of research Pong Teng Siew said the declines registered in the FBM KLCI and other Asian markets were largely a knee-jerk reaction to the regional tensions, exacerbated by the fact this marked the first time North Korea launched a missile over neighbour Japan.

“I expect the geopolitical shocks to subside as markets have become largely desensitised to short-term volatility,” Pong told The Malaysian Reserve (TMR) yesterday.

“After one or two days, we will start to see the effects taper off as common sense prevails,” he added.

He believes the ongoing conflict will pose an issue to the affected markets if it escalates rapidly with no foreseeable end in sight.

“While we are unsure what Japan’s reaction will be, South Korea reacted very quickly, and tensions are at very high levels now,” said Pong.

The ringgit/US dollar exchange rate closed up 0.04% at RM4.2677 — a one-month high for the currency.

Oanda Corp head of trading for Asia Pacific Stephen Innes said Asian foreign-exchange investors — outside of the South Korean won — appear to believe the escalating North Korean tensions will pass, with regional sentiment remaining fragile but largely intact.

“It has been surprisingly subdued in emerging markets after the initial risk aversion,” Innes told TMR.

“The main reason is US Treasury yields are trading at the lowest level since November last year, making higher yielding currencies more attractive.”

He said this strength bodes well for regional sentiment for emerging market currencies, though the South Korean won will continue to be challenged amid escalating tensions.

“Lower US yields, a weaker US dollar and a dovish US Federal Reserve are holding fragile regional investor sentiment in check so far,” Innes added.

In what was termed as an “unprecedented” threat to Japan, the latest North Korean missile test was fired just prior to 6am South Korean time yesterday from close to the capital of Pyongyang.

The missile is the first North Korean projectile to fly over Japanese territory since 1998, and stands to be the first ballistic weapon launched over the country by North Korea.

South Korea reacted quickly to the news, staging live-fire drills after the news broke.

Japanese, South Korean and Australian currencies also fell for the day, though the ringgit remained largely ambivalent to the news.