New Tension Between North & South Korea Rattles The Market

By Static Chaos

U.S. stocks dropped more than one percent on Tuesday with two Korea's exchanging fire adding to the already worrisome Irish debt crisis in Europe.

The latest with Ireland is that European Union (EU) officials estimate that a rescue package may amount to about 85 billion euros ($114 billion). That news sent S&P issuing a new downgrade on Ireland's sovereign debt.


However, Ireland (along with Spain and Portugal, etc.) has mostly been factored in, so the new development in Korea is what really jolted the market (or some may say the market is dying for an excuse to correct.)

The latest conflict between North and South Korea could be counted as one of the most dramatic confrontations since the Korean War in 1953.

Based on Seoul's account, it all started with North Korea warning the South to halt military drills near their disputed sea border. The South, naturally did not comply, and the North retaliated by shelling the small island of Yeonpyeong (clip below).

According to AP, Seoul responded by unleashing its own K-9 155mm self-propelled howitzers and scrambling fighter jets. Two South Korean marines were killed and 15 troops and three civilians were also injured. There are no confirmed casualties from North Korea yet.

The communist side warned of more military strikes if the South violates the maritime border by "even 0.001 millimeter," while South Korea vowed "massive retaliation" should North Korea attack again. 

This confrontation came on the heel of another conflict.  In March, North Korea was blamed for attacking and sinking the South Korean warship Cheonan while on routine patrol, killing 46 sailors.  The North denied responsibility. 

The U.S. reacted by President Obama issuing statement "strongly condemned the attack" and that the U.S. “stands shoulder to shoulder” with South Korea on this. Meanwhile, China--still neck-deep in a similar border dispute with Japan and other neighboring countries--issued a relatively indifferent "call for calm" statement.

I've seen "World War III" and "Gulf War III" mentioned in some news articles over this event, but believe it is an unlikely scenario. A Korean War II serves nobody's interest, including North Korea. And I imagine China is fully aware of how much disruption a Korean war II would bring to its economy.

On the other hand, I would be more worried about a third Sino-Japanese War, since there's a fresh stand-off between Chinese and Japanese patrol boats just past weekend near their disputed islands.

China is indeed Korea times 1,000 or worse when it comes to size and fire power, not to mention the feud with Japan runs deeper than the one between the two Korea's.

So, it seems King Dollar still reigns supreme as long as there's a faintest threat of war and chaos, which will likely give people such as Joe Weisenthal an excuse to continue praising QE2 Is Not Bad For the Dollar.