World markets watch Korean military tensions

In this Dec. 14, 2010 photo, trader Robert Moran, left, check prices as he works on the floor of the New York Stock Exchange. (AP Photo)

LONDON (AP) — World stock markets were mixed Monday as investors watched with unease as South Korea went ahead with a military drill on a frontline island despite threats of North Korean retaliation.

The approval of a U.S. plan to extend tax cuts and unemployment benefits offered some support to markets in Europe and the U.S.

After Asian indexes closed mostly lower, Britain’s FTSE 100 was up 0.1 percent at 5,878.45 while Germany’s DAX was 0.4 percent higher at 7,006.82. France’s CAC-40 advanced 0.7 percent to 3,893.76.

Wall Street was expected to rise slightly on the open — Dow and SP futures were both up 0.1 percent, at 11,440 and 1,239.20.

The market gains came as President Barack Obama on Friday signed into law an $850 billion package that extends Bush-era tax cuts for another two years and expiring unemployment benefits through next year.

Proponents of the measures hope they will boost consumer spending — which makes up for the bulk of U.S. economic activity and a fifth of the world economy. Critics, however, say this will not be enough to justify the cost to public finances.

In Europe, the U.S. tax deal was enough to bring traders’ attention away from the eurozone debt crisis. The euro remains weakened and ratings agencies have warned Ireland, Spain and Greece of possible downgrades.

Figures on the European Central Bank’s bond-buying will be published later Monday and will be scrutinized for any signs the central bank has been stepping up its support for debt markets.

The biggest threat to investor sentiment on Monday, however, were the inter-Korean tensions, a longtime geopolitical risk in Asia.

They spiked to dangerous levels since Pyongyang launched a deadly artillery barrage on the South Korean island of Yeonpyeong last month in response to military exercises by Seoul.

North Korea had warned the South of “catastrophe” if it went ahead with a new round of live-fire drills delayed by bad weather. Seoul finally launched the exercise, which lasted about 90 minutes, on the island Monday afternoon and there were no immediate signs of any North Korean response.

South Korea’s benchmark Kospi index closed 0.3 percent lower to 2,020.28, nearly erasing earlier declines of as much as 1.5 percent. South Korea’s currency, the won, edged marginally higher to 1,150.20 to the dollar. The country’s financial markets often show resilience during times of tension with North Korea.

Still, the uncertainty was seen as a factor in dragging Asian markets lower.

“It’s something that can go very bad,” Jackson Wong, vice president at Tanrich Securities in Hong Kong, said of the Korean tensions.

South Korean technology stocks were mixed. LG Display Co., which has an LCD factory near the heavily fortified land border with North Korea, fell 2.6 percent.

The military tensions hurt sentiment across the region.

Japan’s Nikkei 225 index fell 0.9 percent to 10,216.41 and Hong Kong’s Hang Seng index shed 0.3 percent to 22,639.08.

The Shanghai Composite index slid 1.4 percent to 2,853.92, while Australia’s SP/ASX 200 shed 0.5 percent.

Benchmarks in Thailand, Singapore, Taiwan and New Zealand also retreated, while those in India and the Philippines rose.

In currencies, the dollar fell to 83.80 yen from 83.96 yen late Friday. The euro fell to $1.3153 from $1.3186.

Benchmark crude for January delivery was up 3 cents at $88.05 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 34 cents to settle at $88.02 on Friday.

Kelly Olsen in Seoul and Ji Chen in Shanghai contributed to this report.

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