In East and In West

Tensions mount in Korea and investors see caution flags in Spain as it bails out struggling savings banks. Overnight equity marts throughout Asia and Europe slumped.

North Korea has reportedly put its military on alert, either it is a bluff or not, it will weigh heavily on investor sentiment all the way. South Korean currency KRW has dipped to new 14-month lows against the greenback, adding to the 11.3% decline it has been forced to endure this month alone. It is perched to record its second-worse performing month since the Asian banking debacle shredded markets in the late 1990s. Relations between the two Koreas are at their worst for decades. The North says it has abrogated its non-aggression agreement with the South, trade links have been cut, shipping lanes closed, and the armed forces of both sides are on alert.

The latest move by the US isn’t helping either to lower the tension with its jets deployment in the peninsula. The arrival of the top-of-the line aircraft at Kadena air force base comes after U.S. President Barack Obama reassured Prime Minister Taro Aso in a telephone conversation this week of Washington's commitment to the defence of its Asian ally. And on the other hand, China, being the North Korea's most important ally, biggest trading partner, and main source of food, arms, and fuel, is not fully convinced by Seoul’s arguments. The communist North denies sinking the Cheonan, one of the South's worst military losses since the Korean War.

On the other end of this planet, Spain’s central bank has decided to bail out regional savings bank CajaSur with $621.75 million. The savings banks’ ownership models make it difficult to raise money as they are controlled by local politicians and cannot easily sell shares. CajaSur, formerly run by the Catholic Church, lost $748 million last year and there are 45 savings banks in Spain and investors have yet another reason to pull out of Europe and head for United States.

As risk aversion looks to be in full swing, commodities, coupled with equities and high yielding currencies have taken it on the chin. Oil prices have fallen in tandem with the slumping stock markets and sits south of $68/bbl.