Major war/conflict cycle commencing? (update 11) Nth/Sth Korea - Sth Korea's CDS spreads widen on war fears

Market is trying to figure if it will just 'blow over'.

I think we got a war coming.

HONG KONG, Dec 20 (IFR) – The cost of insuring South Korea’s sovereign debt is higher this morning after reports Seoul is pushing ahead with its military exercise while the broad market was lower amid the regional weakness in stock markets. Liquidity was strained in year-end trade with investors hesitant to take aggressive positions. The benchmark iTraxx investment grade index widened out to 104/107bp from Friday’s close of 104.64bp. South Korea’s 5-year CDS moved out to 96/101bp from Friday’s 90/94bp. It is now close to a two week high. “There was lack dialogue over the weekend, in terms of what is happening in the UN council, so no one wants to touch Korea right now,” said a Hong Kong-based trader at a European bank. “I don’t think people are thinking about war at this point in time, people think it will get resolved in the end,” he said. Standard & Poor’s, which has a A rating on South Korea’s debt rating with a stable outlook, said that war was not the likely scenario at the moment. "The outlook is still stable on our assumption this will not deteriorate into a wide military conflict," said Kim Eng Tan in a telephone interview.

South Korea's stock market was down 0.6%, off the early fall of 1.5% amid signs Seoul is pushing ahead with live firing drills from a disputed island despite threats of attack by Pyongyang and pressure from Russia and China to cancel the exercise. Tan added that although a war was still unlikely, risks of an escalation in conflict were currently "much higher" than they were a month or two ago. "If there is a ramp-up which we believe will almost inevitably lead to war, then we have to take some rating action and this could be quite serious. It may not just be a rating outlook change or even a one-notch downgrade. It could be a several-notch downgrade." Asian stock markets were jittery as tensions heightened on the Korean peninsula with the sharp sell-down in Chinese shares also weighing. The MSCI index of Asia-Pacific stocks outside Japan is down 0.6%.