Markets cautious after North Korean leader's death

By Greg Keller

Associated Press

Published: Monday, Dec. 19 2011 8:46 a.m. MST

Currency traders talk in front of the screens showing the Korea Composite Stock Price Index, left, and foreign exchange rates at the foreign exchange dealing room of the Korea Exchange Bank headquarters in Seoul, South Korea, Monday, Dec. 19, 2011. Asian stock markets slid Monday amid news that the mercurial leader of nuclear-armed North Korea has died, raising fears of increased political instability in the region.

Lee Jin-man, Associated Press

PARIS — European and U.S. stocks edged higher Monday, steadying market sentiment after sharp drops in Asia, where investors worried about the potential consequences of the death of North Korea's absolute ruler, Kim Jong Il.

Markets' initially fell 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 control of the country and dispel any notions of weakness. The United States and others he could do that through martial and provocative actions, such as a military attack on South Korea or a nuclear test.

But after Asian indexes closed lower, European stocks recovered their poise. Germany's DAX rose 0.8 percent to 5,747 and Paris' CAC 40 index rose 1 percent to 3,001. Britain's FTSE was flat at 5,388.

Wall Street opened higher, with the Dow up 0.2 percent at 11,892.42 and the broader S&P 500 up 0.1 percent at 1,220.95.

Investors' attention shifted to talks by EU finance ministers on how to come up with €200 billion ($261 billion) in new loans to the International Monetary Fund to boost a firewall against the debt crisis.

Even if the European Union finance ministers manage to cobble together the promised sum in their afternoon conference call, that amount is widely seen as insufficient to convince markets that the eurozone has the firepower to rescue large economies like Italy and Spain.

The president of the European Central Bank once again dampened hopes that the bank could provide the currency union with the firepower needed to fight off the crisis. Mario Draghi, who will be quizzed by members of the European Parliament later Monday, in an interview with the Financial Times repeated that large-scale government bond purchases were outside the ECB's remit.

Draghi also said that the eurozone should raise the capacity of its own bailout funds, on top of the additional loans promised to the IMF.

Meanwhile, Spain's next prime minister warned that very hard times lie ahead for his country, telling Parliament his incoming conservative government aims to reduce the country's deficit by €16.5 billion ($21.6 billion) next year.

In a keenly awaited speech a month after being elected, Mariano Rajoy still did not specify what bitter cocktail of spending cuts and tax hikes might be used to get the deficit down to Spain's stated goal of 4.4 percent of GDP in 2012.

The deficit was 9.2 percent of GDP last year and estimated by the outgoing Socialist government to be about 6 percent this year — a figure Rajoy suggested may be too optimistic because the economy posted no growth in the third quarter.

The stock gains in Europe and the U.S. helped steady investor nerves after a volatile day in Asia. South Korea's Kospi index dived nearly 5 percent on the news of Kim's death but later recouped some losses to close 3.4 percent lower at 1,776.93.

Japan's Nikkei 225 index dropped 1.3 percent to 8,296.12. Hong Kong's Hang Seng slid 1.2 percent to 18,070.21 and the Shanghai Composite Index rebounded from earlier losses to finish down 0.3 percent at 2,218.24.

Tensions were highest in South Korea and Japan, which have often been the targets of North Korea's mercurial military and diplomatic actions.

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.

The Korean won dropped 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.

Benchmark oil for January delivery was up 49 cents at $94.02 a barrel in electronic trading on the New York Mercantile Exchange.

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

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