KUALA LUMPUR: Asian markets retreated in the wake of North Korea firing two short-range missiles, a day after the reclusive state conducted a nuclear test and fired a similar missile.

Regional markets were also affected by a lack of direction from the US markets, which were closed on May 25 for a public holiday.

The Kuala Lumpur Composite Index (KLCI) closed 0.14% or 1.51 points lower at 1,051.63 points. This followed a bullish run on May 25, when the KLCI ended at a six-month high of 1,053.14 points.

Japan’s Nikkei 225 fell 0.4% to close at 9,310.81 points, Hong Kong’s Hang Seng Index dropped 130.26 or 0.8% to 16,991.56 while Singapore’s Straits Times Index dipped 1.3% to 2,238.79. South Korea’s Kospi shed 28.86 points, or 2.06%, to close at 1,372.04 points.

European markets were also weaker in early trade, while oil on the Nymex dropped US$2 to US$59.67. Crude palm oil fell 3.27% to RM2,365 per tonne.
 
North Korea’s nuclear test on May 25 has sparked international outrage and came after the state exited long-running disarmament talks.

According to analysts, while the situation in North Korea is not expected to have a long-term effect on the market, most investors took advantage of the situation to take profit.

“However, the local market is also waiting to take its cue from the US market, which is expected to have a shaky start following the long weekend. A host of key economic indicators are expected to be announced on May 28, while the news concerning the restructuring of General Motors is expected to have an impact on the Dow,” said an analyst.
 
Maybank Investment Bank (Maybank IB) said the current rally in the KLCI seemed unsustainable. “We believe this market rally has pushed valuations to the point where growth expectations have reached implausible levels. In fact, profits have just begun to turn down,” it said.

The research house also pointed out that the market was currently trading at 15.2 times 2009 earnings, up 12 times from earlier this year.

Also expected to shape the KLCI for the rest of the week is the latest wave of corporate results.
 
“We caution that optimism over growth can disappear as quickly as it appeared. Industrial production peaked in January 2008, but profits only began on a broad-based decline in the first quarter of this year.

“Within our coverage, 63% of the companies that have released first-quarter earnings reported lower sequential quarterly net profits. In seven sectors, our entire coverage list suffered contractions. This suggests the recession in profits has just begun,” said Maybank IB.

On a more positive note, however, the ringgit managed to close stronger against most major currencies on May 26. The local unit ended the day 0.8% higher versus the dollar and 0.27% firmer against the yen.