Market Brief: Markets Steady After South Korean Shock

The dollar is pushing higher, Treasury yields are steadying, and equity futures are advancing as the French government moves closer to collapse and Federal Reserve chair Jerome Powell prepares to deliver potentially market-moving remarks later this morning.

The Korean won plunged yesterday when President Soon Suk Yeol shocked citizens by declaring martial law for the first time in 40 years, deploying the military on South Korean streets. The apparent autogolpe* attempt was quickly undone by lawmakers in an emergency vote - and the currency is now almost fully recovered - but markets have grown more uncertain about the future of one of the world’s most important economies, and global risk appetite remains somewhat more subdued.

Interestingly**, the Japanese yen appeared to exhibit its traditional safe-haven characteristics during the episode, suggesting that the currency’s brief post-pandemic flirtation with risk-on status has now come to an end. Time - and shocks outside Asia - will tell, but market participants would be wise to consider how far the yen could rise if a sell-off in US equity markets were to occur.

The October Job Openings and Labor Turnover report, released yesterday, depicted a labour market that remains tight for employed workers, but somewhat weaker for those looking for a new role. The headline number of job openings jumped to 7.74 million in the month, up from a downwardly-revised 7.37 million in the prior month, the layoff and discharge rate slumped to 1.0 percent from 1.1 previously, and the all-important quits rate climbed to 2.1 percent from 1.9 percent, underlining a high level of confidence among workers.

Federal Reserve officials are unlikely to take much signal from this. Friday’s non-farm payrolls report will play a more important role in setting the stage for the December rate decision, and Chair Powell is likely to maintain a risk-management stance in today’s comments, lobbying for a gradual recalibration in rates as he attempts to forestall potential downside shocks in US labour markets.

The British pound is trading with a softer bias after Bank of England governor Andrew Bailey said he expects to cut rates four times next year - more than markets currently expect. In an interview with the Financial Times, published this morning, Bailey said inflation “has come down faster than we thought it would. I mean, a year ago we were saying that inflation today would be around 1 percent higher than it actually is,” sounding more hopeful than most private sector economists, who expect price growth to remain stubbornly elevated over the next year. Traders have three cuts priced in before the end of 2025, and currency market participants expect rate differentials to help the pound outperform the euro over the next year.

The euro is holding well above parity against the US dollar as traders brace for more turmoil in French politics. Far-right leader Marine Le Pen and her National Rally party are expected to vote with their left-wing allies to support a no-confidence motion that would bring the minority government down later today, forcing a rollover in last year’s budget.

Markets seem well prepared at this point, with intra-euro spreads exhibiting a semblance of stability. Investors are concerned about the credit implications associated with continued overruns in French deficits, but with the government’s debt largely denominated in euro and the European Central Bank acting as a bloc-wide backstop, wider systemic risks look limited at this juncture - making it reasonable to ask why France is being treated differently than the US, which also issues debt in its own currency and has the backing of a powerful central bank.

I may be revealing rabidly-capitalist leanings, but an answer could lie in the extent to which the government crowds out activity in the rest of the economy. With French government spending expected to total 57 percent of gross domestic product this year, against 37 percent in the US, it is likely that markets assume that money is being betrayed into unproductive activities that don’t ultimately increase the economy’s carrying capacity. The two countries may be running deficits at a similar pace, but the US can sustain them for far longer.

*I use this word because it sounds cool, but the phenomenon - in which a leader attempts to stay in office by suspending political processes and assuming other dictatorial powers - is also known as a “self-coup”. The “autogolpe” term was popularised in Latin America, where dozens of similar efforts have been attempted over the last two centuries.

**Admittedly, this may not be interesting to others. If you find it interesting, you may be a nerd. Congratulations.

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