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While you were sleeping: Korean tension hurt stocks

Wednesday 24th November 2010

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Equities on Wall Street and in Europe dropped as tension between North Korea and South Korea escalated while concerns about debt-related troubles in the euro zone failed to fade away. US Treasuries rose.

A North Korean attack on a South Korean island killed two soldiers and set houses ablaze, prompting South Korea to return fire and threaten military strikes. The clash sent the iShares MSCI South Korea Index Fund 5.5% lower and rattled financial markets worldwide.

"We're seeing a knee-jerk reaction to Korea but the underlying story is still the European debt crisis and contagion fears," John Doyle, strategist at Tempus Consulting in Washington, said.

In early afternoon trading, the Dow Jones industrial average declined 1.34%, the Standard & Poor's 500 Index lost 1.43% and the Nasdaq Composite Index dropped 1.68%.

Bucking the trend was J Crew Group which jumped more than 16% after the retailer agreed to a US$2.86 billion buyout by two private equity firms.

US Treasuries rose as investors sought the perceived safety of fixed-income securities.

The yield on the benchmark 10-year note fell seven basis points to 2.74% at 11.44am in New York, according to BGCantor Market Data.

Thirty-year bond yields fell four basis points to 4.17%. Two-year note yields declined four basis points to 0.44%.

Concern about the European Union’s most indebted nations persisted.

National benchmark indexes dropped in all 18 western European markets as investors doubted that Ireland’s request for a bailout would end the troubles in the euro zone.

EU officials estimated that a rescue package for Ireland might amount to about 85 billion euros (US$114 billion), Bloomberg News reported, citing a two officials familiar with the talks.

Meanwhile, Greece pledged new fiscal measures to comply with a 110 billion euro bailout and international lenders said that more help would be available if needed when the three-year rescue scheme expired.

"What we are saying to the markets is we know there could be a problem (for Greece). Don't worry about it, if it proves to be a problem we'll deal with it," IMF mission chief for Greece, Poul Thomsen, told Reuters in an interview.

In Europe, the Stoxx 600 shed 1.5% to 263.62 at the 4.30pm close in London, dropping for a second straight day.

The euro also extended its decline. The euro was down 1.8% on the day at US$1.3376.

The greenback gained 0.91% against a basket of currencies that make up its major trading partners. Even so, the US, currency shed 0.35% to 82.99 yen.

Bank of Ireland plummeted 25% as Irish Prime Minister Brian Cowen said he would seek national elections early next year.

Gold fell 0.4% to US$1,360.15 an ounce by 1212 GMT, from US$1,366.09 late on Monday.

US gold futures rose 0.1% to $1,359.40.

"As for gold, the downside is likely to remain well supported as uncertainty over euro zone economies remains and further weakness in the single currency cannot be ruled out," Andrey Kryuchenkov, analyst at VTB Capital, said.

"Should troubles in the monetary union escalate as optimism over the Irish bailout evaporates, we could well see a renewed run to gold's safe haven appeal."

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