Asia stocks fall as Korea angst lingers, won drops

Sydney - Asian stocks sank, reversing earlier gains, and South Korea’s won fell as concern about tensions on the Korean peninsula kept investors on edge.

Equity measures from Seoul to Hong Kong and Shanghai dropped at least 1% and US index futures declined, as the won led emerging-market currencies lower. Stock volatility increased and the yen climbed.

Other haven assets held near levels from the close on Wednesday, when comments by US government officials helped ease concern the country was headed for armed conflict with North Korea.

South Korea’s military warned Pyongyang on Thursday that it would face a strong response if it carried through with a threat to launch a missile toward the US territory of Guam.

“The North Korea situation is still unstable and investors are controlling risk and taking profit after recent gains,” said Sam Chi Yung, a Hong Kong-based senior strategist at South China Financial Holdings.

Geopolitical tensions may be the trigger for the latest bout of risk aversion, but with global equities trading near record highs and yield premiums on high-yield debt creeping up, some of the biggest names in the asset management industry have already been warning that it’s time to take risk off the table.

Pimco told investors to pare US equities and junk bonds, but keep exposure to real assets, such as inflation-linked debt, commodities and gold. T. Rowe Price cut its stock allocation to the lowest level since 2000.

Recent weakness in US junk-bond prices may be the beginning of a correction for the securities, and investors should consider betting against the market, Morgan Stanley strategists recommended.

Investors are also awaiting for more clues on the implications for monetary policy and US economic growth with a speech by Fed Bank of New York President William Dudley due ahead of Friday’s inflation data.

Chicago Fed President Charles Evans said it would be "reasonable" to announce the beginning of a reduction of the central bank’s balance sheet next month, while cautioning that disappointing inflation data may delay interest-rate increases as technological disruption dampens price pressures.

Here are some important upcoming events:

The Philippine central bank will probably hold its benchmark at 3% on Thursday at the first meeting at which Governor Nestor Espenilla will preside. UK factory output for June is and France industrial production are due on Thursday.

Fed’s Dudley delivers opening remarks at the Economic Press Briefing on Wage Inequality in the Region in New York City, followed by a question and answer session.

Here are the main moves in markets:

Stocks

Japan’s Topix index fell 0.2 percent, while South Korea’s Kospi index slid 1%, adding to a 1.1% drop on Wednesday. The Hang Seng Index in Hong Kong tumbled 1.6%, Taiwan’s Taiex index lost 1.4% and the Shanghai Composite Index dropped 1.1%.

Australia’s S&P/ASX 200 Index lost 0.1%.  

The MSCI Asia Pacific Index fell 0.7% and was on track for its biggest two-day decline since March. Futures on the S&P 500 Index fell 0.2% as of 1:49pm in Tokyo. The underlying gauge closed less than 0.1% lower, all but erasing losses of as much as 0.5%.

Treasuries pared gains and US equities recouped declines in the final hour of trading.

Currencies

The won dropped 0.8% to 1 143.80, while the yen rose 0.1% to 109.98. The Australian dollar fell 0.1% to 78.77. The euro fell 0.2% to $1.1737 and the Bloomberg Dollar Spot Index was up 0.1%.  

The kiwi dollar lost 0.4% to 73.06 U.S. cents. It erased gains of as much as 0.5% after Governor Graeme Wheeler said the Reserve Bank of New Zealand would like to see a weaker exchange rate and FX intervention is always open to the central bank.

Bonds

The yield on 10-year Treasuries traded at 2.24%. Australia’s 10-year bond yield was up one basis point to 2.65%. Germany’s 10-year bund yield declined four basis points to 0.43% on Wednesday.

Commodities

Gold was little changed at $1 276.91 an ounce after falling as much as 0.2%. It surged 1.3% on Wednesday. West Texas Intermediate crude was little changed at $49.54 a barrel after climbing 0.8% the previous session.

US production eased and crude inventories extended declines, trimming a glut.

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