South Korea's brief descent into martial law on Tuesday served as a wake-up call to investors that political uncertainty remains a never-ending risk for global markets.
South Korean President Yoon Suk Yeol shocked the nation on Tuesday when he declared martial law. He accused his opposing political party of holding South Korea hostage by rejecting a budget proposal and initiating 22 impeachment proceedings against government officials.
While the order was lifted by the country's parliament just six hours later, it was still enough time to send a shock wave through South Korea's stock market.
The iShares MSCI South Korea ETF plunged as much as 7%, while South Korea-linked stocks saw big declines before paring losses. South Korea's KOSPI index, which was closed for trading during the declaration and lifting of the martial law decree, declined by about 2% on Wednesday.
Meanwhile, the South Korean won plunged as much as 3% against the US dollar. While South Korea's markets have since stabilized, analysts say the president's actions could have broad knock-on effects and may have done lasting damage to investor confidence.
"We are concerned that these events could impact South Korea's sovereign credit rating," Min Joo Kang, an economist at ING Economics, said on Tuesday.
Kang highlighted that the 2017 impeachment of former South Korean President Park Geun-hye was followed by a hit to consumer and business sentiment and led to a slowdown in economic activity.
President Yoon Suk Yeol is now facing impeachment calls following his martial law fiasco.
Chief Asia economist Mark Williams of Capital Economics also issued a warning for investors on Tuesday surrounding South Korea.
"A period of political instability lies ahead in South Korea that will dent confidence in the economy," Williams said.
And it's not just South Korea that is experiencing political insecurity. The potential collapse of France's government is another event on investors' radar.
The vote of confidence in French Prime Minister Michael Barnier is set to occur later on Wednesday and could dissolve President Emmanuel Macron's government. It would be the first time the French government has been toppled by such a vote in more than 60 years.
This week has seen a spike in currency volatility on the event, with the euro declining by about 1% relative to the dollar in the immediate aftermath of the call for the vote of confidence. It's since recovered most of those losses as the government heads toward the vote.
French bonds are also being hit. BCA Research noted that the spread between French and German government bonds has soared in the last week to the highest level since Europe's sovereign debt crisis in 2012.
"Going forward, we expect French OAT yields to remain quite volatile, which reinforces our current underweight position within European fixed-income portfolios," BCA said in a note on Tuesday.
Meanwhile, the US is also fueling geopolitical uncertainty as the world prepares for a new trade war under president-elect Donald Trump.
Trump has called for steep tariffs, not only against America's economic adversaries like China and countries who threaten to abandon the dollar, but against allies and close trading partners like Canada and Mexico.
Everything from currencies to auto stocks to commodities moved after Trump announced his plan for tariffs on goods from two of America's top trading partners last month.
Barclays estimates that if fully enacted, Trump's tariff threats against Canada and Mexico could lower the corporate profits of S&P 500 companies by 2.8%, likely affecting stock prices.
Investors see trade wars, tariffs, and the disruption of political norms as likely to inject a bout of volatility into markets when Trump takes office next month.
Finally, simmering conflicts in the Middle East, as well as Russia's continued war against Ukraine, have sent out shockwaves through markets all year, with 2025 likely to bring little relief. The war in Ukraine will turn three years old in early 2025, and though Trump has vowed to broker a deal to end the conflict, there's little hope for an immediate end to the fighting.
The ongoing conflicts have rocked assets from gold to bonds to commodities like oil throughout 2024.
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