World stocks jolted by North Korean leader's death

[December 19, 2011]  PARIS (AP) -- European markets edged tentatively higher Monday, stabilizing after losses in Asia, as investors weighed the potential consequences of the death of North Korea's absolute ruler, Kim Jong Il.

Markets' first reaction was to drop on the news of Kim Jong Il's death, which analysts warned could cause an uncertain power transition and put the brakes on talks aimed at getting the secretive communist state to give up its nuclear weapons.

Kim Jong Un, the supreme leader's untested third son and heir-apparent, is expected to want to consolidate his power and dispel any notions of weakness.

Even before Kim's death, the United States and others have said they viewed the power transition as a dangerous time -- when the ascendant Kim Jong Un could seek to demonstrate his leadership credentials through martial and provocative actions, such as a military attack on South Korea or a nuclear test.

"The most likely scenario for regime collapse has been the sudden death of Kim (Jong Il). We are now in that scenario," said Victor Cha, a former U.S. National Security Council director for Asian affairs.

But after Asian indexes closed lower, European stocks recovered their poise. Germany's DAX rose 0.7 percent to 5,741 and Paris' CAC 40 index rose 0.2 percent to 2,979. Britain's FTSE gained 0.3 percent to 5,405.40.

Wall Street was set to open higher, with Dow futures up 0.5 percent at 11,831 and the broader S&P 500 futures up 0.6 percent at 1,218.20.

Overnight South Korea's Kospi index dived nearly 5 percent but later recouped some losses to close 3.4 percent lower at 1,776.93. The Korean won also fell, losing 1.6 percent against the U.S. dollar, a traditional haven in times of uncertainty. The Japanese yen and other regional currencies also weakened against the dollar.

The euro was flat around $1.3030.

Kim's death overshadowed what already was a gloomy start to the week after Fitch warned after the market close on Friday that it may downgrade the credit ratings of heavyweights Italy and Spain, as well as Belgium, Cyprus, Ireland and Slovenia.

EU finance ministers will discuss later Monday how much money their countries will lend to the International Monetary Fund in a conference call.

The ministers will seek to decide how to split up the euro200 billion ($261 billion) EU leaders promised to send to the IMF at a summit 10 days ago.

The money is meant to boost the eurozone's firewall against the escalating debt crisis.

There were some doubts whether the EU would reach the euro200 billion after several non-eurozone countries balked at having to support the currency union.

The ministers will also discuss in their conference call a new treaty to tighten fiscal discipline, a spokesman for the Polish delegation to the European said.

Over the coming days, investors will remain alert to developments in North Korea's power transition.

Kim Jong Il's death, announced Monday by North Korean state television, raises the specter of more instability on the divided Korean peninsula.

Those worries are most acute in South Korea and Japan, which have often been the targets of North Korea's mercurial military and diplomatic actions.

"We're seeing deeper negative sentiment in some markets," said Dariusz Kowalczyk, strategist at Credit Agricole CIB, in Hong Kong. "Basically this is because risk aversion on the geopolitical front has increased given that there's a transition of power in a relatively unstable country. So we're seeing an impact on equities, currencies."

South Korea's military and police went on alert and President Lee Myung-bak, convened a national security council meeting. Japanese leaders said they were watching markets closely and in contact with the U.S., Kyodo News Agency reported.

Kim was ailing after suffering what is thought to have been a stroke in 2008 and died at age 69 on Saturday.

North Korea's official Korean Central News Agency identified his third son, the twenty-something Kim Jong Un, as the "great successor" to the man known officially as the "Dear Leader."

But even with the younger Kim designated as his father's successor, and already filling high-ranking posts, some experts fear a behind-the-scenes power struggle or nuclear instability.

Fitch Ratings said it did not view Kim's death "as a trigger for negative action on South Korea's sovereign ratings in itself."

"For now, it's much too early to say risks have materially increased, but clearly we will keep the situation under close review," said Andrew Colquhoun, head of Fitch's Asia-Pacific sovereigns.

Markets in Taiwan, Singapore, Australia, New Zealand and Indonesia also sank on Monday.

Still, barring unexpected developments in Pyongyang the impact of Kim's death on markets is likely to be passing, analysts said.

"In the short term there will be some psychological uncertainty but I think things will go back to the fundamentals," said Steven Leung, director of institutional sales at UOB-Kay Hian Ltd. in Hong Kong.

Benchmark oil for January delivery was up 51 cents at $94.04 a barrel in electronic trading on the New York Mercantile Exchange.

[Associated Press; By GREG KELLER]

Elaine Kurtenbach in Shanghai and Kelvin Chan in Hong Kong contributed.

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