Asian stocks fell, dragging the benchmark index to the lowest in more than a week on concern North Korea will retaliate to South Korean artillery drills. The won rallied from a one-month low after Agence France-Presse reported the North will allow nuclear inspectors to return.
The MSCI Asia Pacific Index fell 0.4 percent to 133.11 as of 3:20 p.m. in Hong Kong. The won rose 0.2 percent to 1,150.25 per dollar after falling 1.7 percent earlier. South Korea?s Kospi Index dropped 0.3 percent, paring a 1.5 percent slump. Standard & Poor?s 500 Index futures decreased 0.2 percent, while those on the Euro Stoxx 50 Index were little changed. The euro weakened to $1.3159 in Tokyo trading from $1.3188 in New York last week amid speculation Europe?s debt crisis will spread.
Investors became more skittish as South Korea commenced a live-firing drill and the United Nations Security Council failed to agree on steps to ease tension on the peninsula. The dollar also strengthened against the euro before reports this week that economists say will show U.S. economic growth accelerated and personal spending climbed.
?It?s in nobody?s interest for the conflict in the Korean peninsula to erupt into a full-blown war,? said Steve Sevidal, who helps manage $1.24 billion as chief investment officer at Manila-based United Coconut Planters Bank. ?A prolonged debt problem in Europe creates uncertainty and volatility in the financial system that could make investors risk averse.?
About seven stocks fell in the MSCI Asia Pacific Index for every three that advanced. The gauge is set to close at the lowest level since Dec. 10. Japan?s Nikkei 225 Stock Average lost 0.9 percent and Hong Kong?s Hang Seng Index dropped 0.7 percent. Healthcare stocks paced the Shanghai Composite Index?s 1.4 percent drop.
Chinese Stocks Slump
LG Chem Ltd., South Korea?s biggest maker of chemicals, slumped 2.1 percent. Seoul-based LG Electronics Inc., the world?s third-largest mobile-phone maker, sank 0.9 percent.
Artillery positions on Yeonpyeong Island, which was shelled by the North last month, began the exercise at 2.30 p.m. local time after fog cleared, said a defense ministry official who declined to be named, citing government policy. Yeonpyeong abuts the western coast sea border that North Korea says is illegal and that the South insists it will police.
The Kospi and the won pared declines after Agence France- Presse reported a CNN broadcast as saying that North Korea will allow UN nuclear inspectors to return to the country. New Mexico Governor Bill Richardson, who is in Pyongyang with CNN correspondent Wolf Blitzer, also secured an agreement from North Korea to create a military hotline with the U.S., AFP said.
Geopolitical Risks
The country?s defense-related shares climbed. Victek Co., which makes electronic warfare equipment, rose 1.9 percent. Speco Co., a military installation parts developer, gained 8 percent.
?Geopolitical risks boost uncertainties after South Korea said it will proceed with a live-firing drill,? said Song Seong Yeob, a fund manager at KB Asset Management Co. in Seoul, which oversees the equivalent of $17 billion in assets.
China?s Kangmei Pharmaceutical Co. led a retreat among health-care companies after the Economic Observer said the government may cut medicine prices by 40 percent. Kangmei Pharmaceutical lost 4.6 percent, while Beijing Tiantan Biological Products Corp. retreated 2.8 percent.
Perpetual Ltd. shares plunged 15 percent in Sydney after KKR & Co. ended talks for a possible takeover of the Australian fund manager. The drop erased most of the gain since the approach was announced in October. KKR won?t carry out due diligence and Sydney-based Perpetual doesn?t expect further discussions with the New York-based firm, Perpetual said.
Europe?s Debt Crisis
The euro earlier depreciated to $1.3125, the weakest level since Dec. 2. Europe?s currency declined to 110.32 yen, the lowest level since Dec. 7, from 110.77 yen on Dec. 17.
The European Central Bank said it has ?serious concerns? that legislation introduced by the Irish government to fix its banking system threatens the ECB?s ability to run its liquidity operations, according to a position paper dated Dec. 17. France is due to sell 3.5 billion euro ($4.6 billion) of bills maturing in March today.
Moody?s Investors Service on Dec. 17 cut Ireland?s credit rating by five levels to Baa1 and on Dec. 16 placed Greece?s Ba1 local and foreign currency government bond ratings on review for possible downgrade.
?The U.S. dollar will track higher this week with the market forecasts for the economic growth revisions and personal spending reports are a bit underdone,? said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney. ?Overlay that with ongoing concerns, downgrades and the like in Europe and it?s difficult to see the euro climb higher.?
Gold, Treasuries
The U.S. economy grew at a 2.8 percent annual pace in the third quarter, quicker than the 2.5 percent estimate published last month, the Commerce Department will say Dec. 22, a Bloomberg survey of 61 economists showed. Spending by consumers rose 0.5 percent in November after a 0.4 percent increase in October, a separate survey showed before the Dec. 23 report.
Korean tensions boosted demand for safer assets, helping drive gold for immediate delivery up by 0.7 percent to $1,385.47 an ounce. The yield on 10-year Treasuries declined two basis points to 3.3 percent, according data compiled by Bloomberg.
Rubber futures in Tokyo jumped 2.9 percent to a record 410.3 yen per kilogram as rains in Thailand curbed supplies from the world?s biggest producer. The commodity has climbed 48 percent this year.
To contact the reporter for this story: Darren Boey at dboey@bloomberg.net; Ian C. Sayson in Manila at isayson@bloomberg.net.
To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net.
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