Drama on the high seas sent the iShares MSCI South Korea Index Fund (EWY) tumbling on Friday, as reports of an explosion on a South Korean naval ship sparked concerns over a clash with North Korea. The blast occurred near a disputed maritime border between North and South Korea, causing the South Korean vessl to sink and prompting efforts to rescue more than 100 sailors aboard.
It also prompted TV stations to speculate that the ship was hit by a torpedo, although South Korean officials had not yet released an official report. The Wall Street Journal reported that “a short time after the explosion, a second South Korean naval vessel fired shots at an unidentified target.” South Korean officials reported that they didn’t hit the target, which may have been a flock of birds picked up on the radar.
Officials played down any involvement of North Korea in the attack, but investors were clearly concerned that the event was more than an isolated incident. EWY was trading lower by about 1.0% in late afternoon trading, and daily volume had already more than doubled the three month average. EWY tracks the MSCI Korea Index, a benchmark that includes about 100 of the largest publicly-traded South Korean companies.
South Korean equity markets actually closed higher on Friday on news of improved investor sentiment, giving EWY an early boost to start the day. By the time the explosion occurred–between 9 p.m. and 10 p.m. local time–markets in Korea had been closed for hours. This means that EWY could be very active to start next week as well. If additional information surrounding the blast comes out over the weekend, a significant gap between EWY’s closing price Friday and the NAV of the fund on Monday morning could develop.
Tensions between South Korea and North Korea occasionally escalate, sparking investor concerns over the possibility of an armed conflict between the nations. But these standoffs and skirmishes are often resolved peacefully. In November, a brief firefight broke out between two patrol boats, resulting in damage to both vessels. In January, North Korea fired artillery into the maritime border in what officials described as a training exercise. South Korea responded with warning shots into North Korean waters, but no damage was sustained on either side.
The border between the two Koreas was established by the U.N. shortly after the end of the Korean war, but has never been formally accepted by the North.
Disclosure: No positions at time of writing.