South Korea's Political Instability and Global Market Impact
Today's Highlights:
Korean Black Swan
In an unexpected move, South Korean President Yoon Suk Yeol briefly declared martial law. While the situation was quickly resolved, with the National Assembly swiftly rejecting the decree, the incident has raised concerns about the stability of democracies around the world.
The Korean won showed some volatility. While the KOSPI index dropped over 2%, it remained above last month’s lows. The Bank of Korea held an emergency meeting agreeing to provide market liquidity but refraining from cutting rates - a reassuring signal of stability. Globally, the market impact was limited. The FTSE global index and S&P 500 remained resilient, with the latter even hitting a new all-time high.
The VIX index fell for the day, and there was no rush to gold. In Korea, where it's unusual for parliament to be controlled by the opposition, politics had been growing fractious. Encouraging signs that the martial law was resisted, but uncertainties lies ahead.
This event bears some resemblance to the 1991 Soviet coup against Gorbachev, which ultimately exposed systemic fragility. While South Korea’s democracy seems to have passed this test, the analogy serves as a reminder of the risks posed by political fractures in even the most stable democracies.
Fed Cut in Sight
A 25bps cut by the Fed at its December meeting appears increasingly likely. Ahead of Friday's NFP data for November, Fed seems plainly to be moving in that direction. Overnight index swaps suggest that rates will continue to come down, but at a slower pace next year.
Manufacturing supply manager data which has unduly bearishly signaled for a year that the industrial sector is in recession. In 2021, it was a good leading indicator that price rises were coming unanchored. The latest reading has dropped back to 50 level that suggest prices are in balance.
The Job Opening and Labor Turnover Survey (JOLTS), with a 1-month lag suggests that number of people quitting jobs rose in October as did the total number of openings. Closer examination shows little that would put off the Fed from making December's cut. While the numbers are volatile, official data with new job postings index tracked by Indeed suggest a continuing gradual downward trend. The quits rate, a leading indicator for private sector wage growth, points to continuing deceleration in pay rise.
Fed speakers have been out in force. While none promise a cut, and stress that there's more data coming over the next 2 weeks, they hint the most likely path involves a cut in December followed by a pause.
Crude Reality
Oil prices rose over 2% to a two-week high after the US announced sanctions on Iranian oil. However, a persistent supply glut has kept prices in check. Despite rising geopolitical tensions, including the Middle East conflict and nuclear risks from the Russia-Ukraine war, oil is down 4% this year and has risen just 9% since 2020.
OPEC plans to delay a scheduled production hike of 180,000 barrels per day in January by three months. However, weak demand limits the impact of these measures. Bank of America notes that non-OPEC supply is set to grow in 2025, while demand may stagnate or decline if Trump-era tariffs return. This imbalance could continue to pressure prices.
Oil markets have trended lower despite occasional support from geopolitical risks. Prices around $73 per barrel remain above US breakeven levels of $64 per barrel, according to Federal Reserve surveys. However, $89 per barrel would be needed to significantly increase drilling activity.
Trump’s energy policy, focused on deregulation and increased permits, is unlikely to drive substantial production growth. Weak demand remains the primary challenge, outweighing OPEC+ efforts and geopolitical tensions. A meaningful price recovery depends on a stronger global economy, particularly in China.