South Korean stocks and the won dipped after North Korea said it had conducted a nuclear test on Monday, but the reaction was limited as investors had expected such a move from the North and have become long accustomed its provocations.
An initial tumble in South Korean shares and pull-back in higher-yielding currencies proved short-lived as market players believed North Korea's action was another political gambit aimed at securing concessions from major global powers.
North Korea's nuclear test, along with reports that it also fired a short-range missile, was set to isolate the reclusive nation even further. Japan requested a United Nations Security Council meeting later in the day. Seoul's KOSPI index slipped 0.3% but had slid more than 6% at one point in the knee-jerk reaction.
The cross-market reaction was limited, especially since North Korea had warned about conducting such a test for weeks. Safe-haven gold was little changed and government bond prices fell slightly, while Japan's Nikkei average climbed 1.3%.
"This is another setback, but it is not something we feel will have a lasting impact on the market," said David Mann, FX strategist and head of Korea research at Standard Chartered in Hong Kong.
The MSCI index of Asia-Pacific shares outside Japan shed 0.4%t, pulling further away from a seven-month high struck last week. Technology shares, which have helped power this year's rally, led losses. Samsung Electronics was the biggest drag on the KOSPI, falling 1.5%.
Traders in Seoul said foreign investors took advantage of the KOSPI's sharp drop to shift more funds into the market, which has been one of the world's best performing equity indexes this year with a rise of more than 24 percent.
"We believe the falls will be relatively short-lived, though the market's precise direction will depend largely on how political circles respond to the test," said Kwak Joong-bo, a market analyst at Hana Daetoo Securities in Seoul.
Asia has been a favorite destination for investors betting the region will be on the front edge of any global economic recovery. In the week ending last Wednesday, investors poured $933 million of funds into Asian equity markets excluding Japan, the biggest intake among major emerging market fund groups followed by fund tracker EPFR Global.
Shares in China recovered from an initial drop after the government's announcement that it would allow companies to resume listing shares, which stoked worries that a flood of stock supply could hit the rallying market. The Shanghai Composite index edged up 0.1%, getting a lift from shares of PetroChina, Asia's largest oil and gas producer.
PetroChina rose 2.3% said it acquiring a 45.5% stake in Singapore Petroleum Company for $1 billion and planned to make a general offer to buy the rest of the firm.
The resumption of IPO listings in China was taken as a sign that authorities saw the Shanghai Composite's more than 40%t surge this year as being solid enough to withstand any spate of equity offerings.
Market activity was limited, with U.S. and British financial markets closed later in the day for holidays.
The dollar pushed up 0.3% to 95.05 yen, edging away from a two-month low hit on Friday.
The yen gave up initial gains and fell as market players who were betting that the North Korea test would spark a bigger drop in higher-yielding currencies covered positions.
The Australian dollar shed 0.2 percent to $0.7810 but recovered from a session low of $0.7774 hit on the nuclear test news.
The South Korean won, the hardest hit of Asian currencies during the financial crisis, also bounced back to lose just 0.1% at 1,248.5 to the dollar after having slid as far as 1,268.9.
The resilience of stock markets put more pressure on government bonds, already straining from a sell-off in U.S. Treasuries on worries the U.S. government could lose its top triple-A credit rating and be forced to offer higher yields to foreign investors.
June Japanese government bond futures lost 0.16 point. The 10-year JGB yield edged up 1.5 basis points to 1.445 percent.
The optimism reflected in stock markets has contrasted with the cautious tone of some central bankers.
Bank of Japan Governor Masaaki Shirakawa said on Monday that any recovery in the world economy will be a mild one because it will take a considerable time to get rid of the excesses built up during the boom years. (Reuters)